As fiduciary heat is turned up, more DC plans look at outsourcing
A few years ago, Don Ezra wrote a short piece called “Defined Contribution is not the soft fiduciary option.” From today’s perspective, it’s surprising that anybody could ever have thought it was. One of the ways in which fiduciaries are responding is to look to outsource more of their responsibilities.
No longer the soft fiduciary option
There’s no question that over the past few years, the heat on DC fiduciaries has been turned up both by litigation—lawsuits such as Tibble vs. Edison and Tussey vs. ABB—and regulation.
This extra fiduciary heat is giving a boost to outsourcing, leaning more heavily on outside experts. Many elements of running a DC plan have always been delegated, and it is a basic fiduciary principle that if you’re not an expert in a particular task, you should find someone who is. But today’s outsourcing is more explicit in its treatment of fiduciary responsibilities: along with responsibility for the management of a service, fiduciary responsibility for that service is also transferred.
This raises a long list of questions, though. In a series of papers written over the past few months—and now available packaged in a single compendium—Mike Barry has worked through these questions. Among the topics he covers are:
- What functions (whether strategy, investment management, or administrative) can be outsourced? (Outsourcing is not an all-or-nothing proposition).
- What fiduciary responsibility does the plan sponsor retain? (At a minimum, they generally remain responsible for the selection and monitoring of the service provider.)
- How do you go about selecting an outsourcing provider? (Different types of firms have different business models, and different strengths and weaknesses.)
- What should an outsourcing contract include? (Both parties should be clear and in alignment on the terms of the relationship.)
Interest in outsourcing has grown in recent years, largely as a response to greater complexity and added demands on plan sponsors with limited time and resources. As DC has become the primary retirement saving vehicle for private sector workers, expectations have increased. So fiduciary considerations are not the only driver here. But they do serve to focus attention.
The series of lawsuits and regulation and the resulting changes in the fiduciary landscape are not over; some lawsuits are yet to be fully resolved (and others, presumably, are yet to appear), while the ongoing saga of the DOL fiduciary rule is just one of a number of regulatory strands. The nature of the outsourcing market, likewise, seems likely to continue to evolve.