Pros, cons of outsourcing fiduciary retirement investment responsibilitiesNews added by Benefits Pro on April 8, 2014

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By Paula Aven Gladych

Outsourcing fiduciary investment responsibilities related to company-sponsored retirement plans has become a big business, as retirement plan sponsors struggle to make the right decisions for their employees and meet all of the regulatory requirements that go along with offering a plan.

David Levine and Allison Tumilty of Groom Law Group said in a recent Practical Law article that companies that outsource their fiduciary responsibilities to third parties must consider the interests of the plan and its participants and keep to plan documents when making this decision.

There are numerous advantages and disadvantages to outsourcing investment fiduciary responsibilities, according to Levine and Tumilty.

The potential benefits to outsourcing include:
  • Access to compliance expertise and technology: Increased legal requirements for administering ERISA-covered retirement plans and managing plan assets have grown increasingly complex while the consequences of failing to meet these requirements have become more onerous. Outsourcing shifts responsibilities to service providers with better knowledge of these requirements.
  • The ability to focus on their core business.
  • Improved documentation: The use of third-party service providers may result in improved documentation of investment processes and procedures.
  • Limiting plan sponsor fiduciary risk: Outsourcing limits risk by providing improved plan administration, management and compliance processes.
  • Economies of scale: A plan may be able to participate in investment opportunities or investment share classes that might not otherwise be available to the plan because of its size.
Possible disadvantages include:
  • Cost: Outsourcing may be more expensive to the plan and its participants than in-house services;
  • Dissatisfaction with services: Plan sponsors may have less control over services with outsourcing, making it more difficult to immediately improve services if there is a problem
  • Lack of control: some plan fiduciaries may find they prefer a greater degree of control over the plan’s investment options and features
  • Ongoing monitoring: In most cases, it will still be necessary for plan fiduciaries to monitor the general prudence of the outsourced investment manager’s activities even though the plan fiduciaries no longer have direct authority over the selection and oversight of plan investments.
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