401(k) Specialist Issue 1 - 2021 - 41

401(k) FIDUCIARY
significant assets thinking their plan doesn't yet
need the types of services outsourced investment
fiduciaries provide, Buckmann cited two
main reasons.
" One is the desire to retain control over
decision making, and the second is a failure
to understand the full scope of fiduciary
responsibilities and fiduciary liability exposure,
including personal liability for losses caused by
fiduciary breach, " Buckmann said. " In addition,
some smaller plan sponsors may not know how
to go about finding the right provider, or that
they can hire people to help with RFPs. "
Here's one place advisors can step in.
Advisors could help with the request for
proposal (RFP) to find the new providers
and assist in reviewing and monitoring the
outside providers, which many plan sponsors
lack the expertise to do, Buckmann said. " If
the advisor's organization provides investment
management or OCIO services, the
benefit of outsourcing should certainly be
discussed with the advisor's clients. I think
that advisors who put their client's needs first
will have a competitive advantage. "
The RFP should be designed to find candidates
with proven experience in ERISA plans.
Given the level of litigation and enforcement
actions, hiring the right professional is crucial,
Buckmann noted. Failure to do a good RFP
or opting to hire social connections without
investigating their qualifications could be a
costly mistake.
If a company fiduciary or owner can't get
comfortable giving up control, outsourcing may
not be a good fit. An investment advisor will
give professional advice while leaving the actual
decision-making in the hands of the company
fiduciaries, at the cost of remaining responsible
as co-fiduciaries for investments.
" I think there is sometimes a view that
advisors may be advising themselves out of
a job if they recommend outsourcing and
their firm doesn't provide it, " Buckmann
said. " However, if they encounter situations
where the plan sponsor fiduciaries aren't on
top of things, they would better serve the
plan sponsor by recommending outsourcing.
There may still be a role for them if there is
an investment manager or OCIO. "
One other consideration: Employers
joining new Pooled Employer Plans (PEPs)
debuting this year as a result of the SECURE
Act (see related article on page 22) may have access
to fiduciary investment services through
their plans.
Why OCIOs?
What does an OCIO do that a 3(38)
investment manager doesn't do? An investment
manager will select a plan's investments
and may construct model portfolios for the
plan to use. OCIOs can help the plan obtain
institutional quality investments, such as custom
target-date funds, and they can leverage assets to
obtain lower fees.
Buckmann notes that OCIOs can provide
investment management services-as would a
3(38) investment manager-but an OCIO can
be a " named fiduciary " of the plan and provide
more extensive services. " OCIO arrangements
vary, but in addition to helping the plan
obtain institutional quality investments, an
OCIO may take responsibility for functions
such as plan design, plan communications,
documenting plan investment decisions and
plan governance, " Buckmann said. " Many
plan sponsors lack the time and expertise to
handle these functions well. "
Brian Anderson is Managing Editor of 401(k) Specialist.
Fiduciary Liability Insurance Premiums Skyrocket
F
rom the courts' perspective, the main responsibility of a plan fiduciary is to follow a prudent process in making plan-related
decisions. But litigation-proof documentation isn't easy to accomplish.
That being the case, many companies look to fiduciary liability insurance to protect themselves. These policies, while not legally
required by ERISA, are specifically designed to protect against the legal liability arising out of their role as fiduciaries. It typically
covers associated legal costs to defend against claims of errors and a breach of fiduciary duty.
Unfortunately but understandably, the proliferation of 401(k) lawsuits has resulted in a serious spike in fiduciary liability insurance
premiums-and the coverage is getting increasingly difficult to purchase. The policies are becoming more restrictive, with more
exclusions, lower caps on coverage and higher retention fees to renew policies.
Pensions & Investments reported last October that fiduciary liability insurance premiums are up a staggering 35% as a result of
costly awards and settlements.
As insurers adjust premium rates and coverage limits, many plan sponsors will likely face a gap between the coverage they need and
what they can afford. Others will look to obtain coverage from multiple insurers to get around coverage limits-if they can afford to.
" I advise clients to purchase as much coverage as they can reasonably afford because litigation is expensive even if you win, and
the required plan bonding coverage doesn't protect them, " said Carol Buckmann, an employee benefits and ERISA attorney with
Cohen & Buckmann.
" Some fiduciaries rely on corporate indemnification promises, but those may not mean much if the plan sponsor is in financial
difficulty, " Buckmann added. " Fiduciaries may also think E&O policies will protect them, but I often see E&O policies that specifically
exclude coverage as a plan fiduciary. For all those reasons, fiduciary liability insurance has become a practical necessity, even though
it is not legally required. "
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401(k) Specialist Issue 1 - 2021

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