Look what happened to the role of the plan sponsor. (Photo: Shutterstock)
Back in the stone ages, once companies reached a certain size, they were obligated to provide a retirement plan. They needed to offer the promise of a worry-free old age in order to compete with other companies for workers.
The promise didn't have to actually be fulfilled. Indeed, there were so many employment provisions in traditional pension plans that far fewer retirees realized the benefits promised them than many today assume. Still, pensions became such a liability that companies – as a result of shareholder behavior – sought to ensure sustainability by replacing defined benefit plans with defined contribution plans.
While this shift did help from a corporate finance standpoint, it failed to reduce the fiduciary liability of the plan sponsor.
That all began to change when companies discovered the regulatory environment had begun to allow at least some of this liability to be delegated to service providers (q.v., 401(k) Fiduciary Solutions: Expert Guidance for 401(k) Plan Sponsors on How to Effectively and Safely Manage Plan Compliance and Investments by Sharing the Fiduciary Burden with Experienced Professionals).
Soon it became apparent to plan sponsors they could choose exactly how much and which portions of their fiduciary liability they could legally delegate (see "What Do Most 401k Plan Sponsors Use: a 3(38) or a 3(21) Adviser?" FiduciaryNews.com, August 20, 2019).
It is this evolution of delegation that bears interest. It helps to explain what we've seen in the retirement plan industry.
It may also help us understand where the industry will go next.
In the beginning, there was the profit-sharing plan (we're going to skip ahead past the pension plan era). The plan sponsor would hire a Registered Investment Adviser (or a bank trust department) to oversee the investment portfolio. The plan sponsor would remain responsible for determining (with the help of an accounting professional) the demographic trends of the plan participants. The plan sponsor would then be held accountable for transmitting that information to the RIA and then monitoring the activity of the RIA to make sure the profit-sharing plan was invested properly.
You can see there's a lot of moving parts here when it comes to fiduciary liability.
The attraction plan sponsors had toward the novel idea of a 401(k) plan had to do with removing some of that fiduciary liability. In exchange for placing at least three distinct investment options on a menu employees could pick from, the plan sponsor was given safe harbor (to an extent).
At first, plan sponsors picked the RIA to manage these three portfolios much in the same way they selected portfolio managers for their profit-sharing plans. This didn't change the situation that much, and plan sponsors remained on the hook for learning the investment management business.
Then along came an opportunity for plan sponsors to take on a partner, a co-fiduciary. This is the 3(21) option. The plan sponsor retained the responsibility for the ultimate decision, but an RIA was there riding shotgun, vetting all the investment options.
For plan sponsors, the world got a little better. But not much better.
Then came the understanding that this fiduciary liability didn't need to be shared, it could be off-loaded. This is the 3(38) option. Here the plan sponsor hands the keys to the car to the RIA. Sure, the plan sponsor couldn't delegate all of the fiduciary liability, but 3(38) takes away the bulk of it.
This was a quick recap. Most know all the details. It's the 30-thousand-foot level, however, that bears attention.
Look what happened to the role of the plan sponsor.
Rather than focus on "plan sponsor" as an amorphous entity, it helps to recall that it is corporate executives within the C-Suite that are tasked with doing the real work in maintaining the company's retirement plan. These are the same people tasked with making sure the trains run on time at the shop.
In fact, they don't get paid if the trains don't run on time.
Put your feet in those shoes. You have an incentive to get those trains running with all their might. You're amped up to do it. You want to devote all your time to doing it.
But then you're handcuffed by this corporate retirement plan. Worse, not only does it not have an upside, but it has a very unhealthy (for you) downside.
If you had the chance to reduce that downside, wouldn't you leap at it?
And if you had the chance to eliminate that (but still keep the plan), why, that would be Nirvana.
Do you see where this is going? Do you now see where the industry is going?
It's best to hop on that train before it leaves the station.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
