ADVISOR ATTRIBUTES

Managing a retirement plan requires ongoing oversight, documentation, and compliance with ever-changing regulations. The fiduciary standards under ERISA have been cited as the “highest known to the law” by the courts. Despite the harsh implications of ERISA rules, a surprising number of plan sponsors are unaware of their potential exposure. The plan sponsor and their fiduciaries can be subject to personal liability and civil penalties for breaching their duties under ERISA, and they can also be held responsible for the misconduct of co-fiduciaries and service providers. While plan sponsors are subject to complex fiduciary responsibilities under ERISA, a qualified advisor can make it easier for the plan sponsor to meet their obligations.

Many plan sponsors mistakenly assume that one or more of their service providers (e.g. advisor, TPA, mutual fund company, payroll provider, etc.) is protecting their company and plan fiduciaries from liability. Unfortunately, most service providers assume ZERO fiduciary responsibility for employer-sponsored retirement plans. Third-party administrators (TPAs) may help to reduce some of the plan sponsor’s administrative liability (plan documents, compliance testing, Form 5500; notifications, etc.). But most TPAs specifically state in their service contracts that they are not fiduciaries, and in particular, place the ERISA title of plan administrator on the employer. Brokerage firms, insurance companies, fund companies, and even payroll companies have little interest and strong disincentives to fiduciary behavior. Most of them prohibit their representatives from accepting fiduciary responsibility.

Another common misconception by plan sponsors is the belief that their liability diminishes when employees are given the opportunity to choose their own investments. Shifting the obligation for investment selection to employees does not change the legal responsibility for the plan sponsor. Even in a participant-directed plan where employees choose their own investments, the plan sponsor has the ultimate legal responsibility for the investments. The plan sponsor may receive the “safe harbor” protection offered by ERISA 404(c) only when the investment options offered to employees are suitable and prudent for the plan and remain so on an ongoing basis. The plan sponsor has a continuing duty to select, monitor, and remove imprudent investments from the plan.

It’s not uncommon for plan sponsors to engage a “professional” advisor with the idea that the responsibility and liability for investment selection and monitoring is automatically transferred to the advisor upon hire. However, under ERISA, there is only one way for the plan sponsor to transfer or virtually eliminate investment-related fiduciary liability: execute an advisory agreement with an ERISA Section 3(38) defined investment manager. The 3(38) investment manager must be a qualified firm and must acknowledge its fiduciary status in writing.

When an advisor contracts with the plan sponsor to manage investment decisions on its behalf of plan as a 3(38) investment manager, the advisor is responsible to select, monitor, and make changes to investments when dictated by poor performance or other factors. This delegation represents a number of advantages for the plan sponsor. First, the advisor will monitor the plan investments on a continuing basis. As a result, decision-making should become more efficient. Secondly, the role of the plan sponsor and other fiduciaries, such as the plan committee becomes one of oversight. Accordingly, the advisor must meet periodically with the plan sponsor and still deliver investment reports. The plan sponsor is relieved of the decision-making burden but must still evaluate the reports. Thirdly, the plan sponsor is likely to be relieved of fiduciary responsibility for the investment decisions of the plan. ERISA specifically grants this relief for plan sponsors when a properly qualified advisor is prudently selected and appointed to serve in an investment manager capacity.

It should be of critical importance for the plan sponsor to engage a fiduciary advisor who is fully cognizant of ERISA roles and responsibilities. Some advisors will help to identify plan fiduciaries, provide training to plan fiduciaries, coordinate plan management, and maintain a plan governance system.

Companies that establish retirement plans for their employees are expected to understand and comply with ERISA. Failure to demonstrate adherence to the rules outlined in ERISA can result in penalties, fines, or even disqualification of the retirement plan completely. Regulations are continually changing and place more demands for plan sponsors to prove that they are making the best possible choices for employees and encouraging optimal retirement readiness.

Managing a retirement plan requires specialized knowledge (i.e. ERISA) and presents unique challenges that are beyond the expertise, skills, and legal status of most financial advisors. Few plan sponsors fully understand their duties as a retirement plan fiduciary and the personal liability under ERISA. As a result, the need to engage a qualified plan advisor is critical.

Today’s plan sponsor needs an advisor who has the expertise and in-depth knowledge of ERISA and fiduciary standards of conduct AND will serve as a fiduciary to the plan. The advisor should be able to employ fiduciary “best practices” and perform critical services to help the plan sponsor manage fiduciary responsibilities, mitigate liability and ensure the plan operates smoothly on a continual basis.

ERISA requires that advisors disclose information regarding all services to be performed and all direct and indirect compensation generated from the plan. It’s important to differentiate if the advisor works directly for the plan sponsor as a fiduciary advisor, or if they are affiliated with a brokerage firm, bank, insurance, or mutual fund company.

It is the responsibility of the plan sponsor to ensure that there are no financial incentives in the arrangement that would cause the decisions of the advisor to be questioned. According to the Securities and Exchange Commission, any advisor reliant on commissions and other sales incentives "inevitably leads to conflicts of interest" that can hurt employees. Plan sponsors need to know:

• What is the advisor’s estimated annual compensation and how is it calculated?
• Does the advisor get paid different amounts depending upon which investments participants select?
• Does the advisor provide you with a written fee estimate that details this information?

Advisors use Form ADV to register as an investment advisor with the Securities and Exchange Commission and for state registration. If the advisor does not have a Form ADV, then they are NOT a Registered Investment Advisor (RIA). It is important that plan sponsors understand that not all “advisors” are Registered Investment Advisors.

Working with an RIA provides several distinct advantages for the plan sponsor and employees:

• RIAs are held to the highest fiduciary standard and must always act in the best interest of the client
• RIAs are required by law to disclose any conflicts of interest that might impact or bias their advice
• An independent RIA can recommend the very best solutions for its clients

Before hiring a retirement plan advisor, the plan sponsor should always ask for, and carefully read, the advisor’s Form ADV (Part I). The ADV is also available on the Investment Advisor Public Disclosure website at www.advisorinfo.sec.gov.