Can You Outsource Fiduciary Responsibility? Not Fully

No, you can’t fully outsource fiduciary responsibility for your company’s retirement plan. You can hand off many tasks to outside professionals, such as a recordkeeper, a 3(16) plan administrator, or a 3(38) investment manager, and some of those providers will take on fiduciary status specific to the work they perform. But under ERISA, the plan sponsor always keeps the duty to prudently select those providers and to monitor them on an ongoing basis. In other words, outsourcing can lighten your workload and share some of the risk, but it doesn’t take you out of the fiduciary role.

Ongoing Oversight of ERISA Plans Is A Must

At finance and accounting firm Smith+Howard, Claudia Perez cautions busy business owners against neglecting their responsibilities to company sponsored retirement plans, and underscores the importance of providing ongoing oversight:

• It’s easy to assume that once a retirement plan is established and the right service providers are in place, much of the work takes care of itself. In reality, plan sponsors still play an important role in overseeing the plan and ensuring it operates as intended. Recordkeepers, third-party administrators (TPAs), retirement plan advisors, legal counsel, and other service providers may handle important pieces of the process, but having those providers in place does not eliminate the need for ongoing oversight.

• For those serving in a fiduciary capacity, ERISA establishes important standards for how they carry out their responsibilities.

• These responsibilities are not limited to major decisions made once or twice a year. They show up in the day-to-day administration … .Consistent processes and ongoing oversight matter.

• One of the most important things a plan sponsor can do is understand where responsibilities sit among the internal team and the plan’s various service providers. 

ERISA retirement plans are regulated by the Department of Labor (DOL), so it is wise for sponsors to periodically brush up on how the government specifically defines their role. If it has been a while (or never) since you reviewed Meeting Your Fiduciary Responsibilities | U.S. Department of Labor, you will find it clarifying to spend a half hour or so digesting key points, such as:

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently;
• Following the plan documents (unless inconsistent with ERISA);
• Diversifying plan investments; and
• Paying only reasonable plan expenses.

As an example of “acting prudently,” Perez points out: “When specialized expertise is needed, part of acting prudently may include engaging, qualified professionals and appropriately monitoring the providers selected.” She also observes that it’s generally not bad faith that gets plan sponsors in trouble, but mistakes and failure to monitor: “From an auditor’s perspective, many of the issues we see don’t result from someone intentionally doing something wrong. Often, a process changed, responsibilities weren’t clearly defined, information wasn’t communicated between parties, or something simply wasn’t monitored consistently.” 

Keeping Up With Changing Policies and Procedures

The scale and scope of changes phased in by both the original SECURE Act, and SECURE 2.0 have provided numerous opportunities for errors and oversights by plan sponsors. Simply put: it’s hard for plan sponsors, especially those from small and midsize businesses and plans, to keep up with evolving priorities and protocols. For example, new eligibility rules related to long term part-time employees (LTPT) have required attention. (If you are not up to speed, see this breakdown on the LTPT eligibility requirements from Ascensus.) Meanwhile, the DOL’s Employee Benefits Security Administration (EBSA) has made cybersecurity its number one current enforcement priority, and that also requires increased attention from plan sponsors: 

This project addresses the growing risks cyberattacks pose to employee benefit plans and participants. It promotes best cybersecurity practices for plans and service providers to protect sensitive information and reduce the risk of fraud and financial loss. As part of its investigations, EBSA reviews how plans and service providers protect their systems and data from cyber threats. This project builds on cybersecurity guidance issued in 2021 and updated in 2024.

The Best Approach: Compliance, Diligence and Protection

No matter how diligent a plan sponsor and their chosen service providers are, costly mistakes do happen—and that makes protection essential. 

A common misconception among small and midsize business owners is assuming the required ERISA Fidelity Bond protects them personally if a participant sues over a calculation error or an alleged breach of fiduciary duty. It doesn’t. 

There are three broad categories of risk sponsors need to be concerned about, and the ERISA Bond only covers one: 

• ERISA Fidelity Bond: protects the plan’s assets from theft or fraud by people who handle plan funds.
• Fiduciary Liability Insurance: protects the fiduciaries, including plan sponsors, themselves — their personal assets and the company’s finances — from the cost of defending and resolving claims of mismanagement or breach of duty.
• Cyber Liability Insurance: helps to cover the plan’s exposure to data breaches and cyberattacks, an area regulators are watching closely right now.

Colonial Surety Company, makes protection efficient and affordable for every retirement plan sponsor, regardless of the size of the business. Uniquely, our Fiduciary + Cyber Liability Bundle combines the ERISA Fidelity Bond, Fiduciary Liability Insurance, and Cyber Liability Insurance so plan sponsors aren’t left guessing which risks are actually covered. 

In business since 1930, Colonial Surety Company is rated A.M. Best “A (Excellent)”, U.S. Treasury-listed, licensed in all 50 states, rated 4.8 on Trustpilot, and makes it simple for retirement plans sponsors to get every layer of protection in place, without piecing it together from multiple sources.