Although defined benefit pension plan sponsors have engaged investment managers for years, it’s only recently that defined contribution plan sponsors have begun exploring this option to limit liability risk for their fiduciary role.
“Because employers want to avoid litigation, which could result in personal liability for investment committee members, many plan sponsors are seeking ways to manage the risk associated with serving as an ERISA fiduciary, …,” according to a June 28 report from Vanguard Strategic Retirement Consulting, which advises DC plans on fiduciary best practices. In “Mitigating Fiduciary Liability for Defined Contribution Plan Investment Decisions,” Vanguard offers four options that may help DC plans sidestep high-profile class-action lawsuits alleging breach of fiduciary duty on investment selection and monitoring.
These risk mitigation strategies can range from a “do-it-yourself” approach to hiring an independent investment management fiduciary to choose and monitor the plan’s investment options without input from the plan sponsor. Typically, the more involved the outside investment manager, the more expensive the service — yet plan sponsors still retain fiduciary liability for some actions, including the hiring and oversight of an investment manager.
The four risk reduction approaches Vanguard outlines, in order of plan sponsor involvement, are:
- Do-It-Yourself. For many plan committees, sticking with a well-defined, deliberative, documented process should be an acceptable and manageable approach to risk mitigation. To do this, many sponsors use investment design tactics that include a qualified default investment alternative in a tiered investment lineup.
- Purchasing fiduciary liability insurance. Plan sponsors can further limit personal financial exposure by purchasing fiduciary liability insurance, Vanguard said. Claims fiduciary liability insurance policies commonly cover include breach of fiduciary duty, negligence regarding plan administration, defense costs, settlements and judgments. These policies do not cover claims of discrimination, fraud, illegal profiting from the plan and acts before the effective date of the policy, however.
- Securing fiduciary warranties. Some investment providers offer a form of fiduciary warranty or guarantee to plan sponsors. Generally, these products provide some protection against plan losses and litigation costs resulting from or related to a plan’s investment offerings. But they depend on their terms and the warrantor’s ability to pay, so some may not offer much protection.
- Hiring third-party assistance. Some plan fiduciaries may decide to hire an outside professional to assist with investment decisions. These third parties include consultants, investment advisers and investment managers.
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