Tech & Sourcing @ Morgan Lewis


The ERISA Advisory Council recently approved an investigation focused on the exercise of plan administrators' fiduciary obligations with respect to outsourcing investment management or other services under retirement plans. The Advisory Council, which is organized under the Employee Benefits Security Administration of the Department of Labor, approved the plan on March 26, and it will conduct its investigation throughout 2014, with the goal of identifying best practices for fulfilling the administrator’s duties in such transactions.

Outsourcing various plan administrators’ functions, including selecting funds and overseeing plan investments, is a popular practice because of the complexity of retirement plans and the obligations imposed on plans and administrators by the Employee Retirement Income Security Act (ERISA). Under ERISA, a plan administrator can appoint an ERISA section 3(38) “investment manager” to perform certain services, and the administrator will not be liable for the acts or omissions of this “investment manager” in its performance of the services. To receive this protection from liability, the plan administrator must fulfill its fiduciary duty to the plan by prudently appointing and monitoring the third-party manager. The Advisory Council’s investigation will focus on the fulfillment of these fiduciary duties.

Outsourcing these investment management functions to service providers with experience in both fund administration and regulatory compliance offers numerous benefits in terms of access to expertise and improved efficiency and effectiveness of plan administration. The Advisory Council’s planned investigation is evidence that it is not entirely settled as to what is required of a plan administrator, as a fiduciary, in making a decision to pursue these benefits. Plan fiduciaries considering outsourcing investment management functions should ensure that the decisionmaking process regarding whether to outsource these functions and the selection of the service provider are properly considered and documented. In addition, the planned investigation reaffirms the need for flexibility in agreements governing investment management services, specifically to allow for any reported best practices for the ongoing monitoring portion of the ERISA requirements to be included in the service provider’s performance obligations.

The Advisory Council released an issue statement that sets forth the objectives and scope of the planned investigation, which will commence at the council’s meeting from June 17 to 19.