2014 Issue Statement for the ERISA Advisory Council
Outsourcing Employee Benefit Plan Services
Issue Chair: Ralph Derbyshire
Issue Vice-Chair: David Kaleda
Drafting Team: Cindy Hounsell and Deborah Smith
Description of Issue
Management and administration of employee benefit plans is increasingly complex. Through outsourcing, plan sponsors can gain access to expertise and technology, achieve economies of scale and reduce costs. Outsourcing also permits a plan sponsor to focus on its core business rather than the business of managing its employee benefit plans. Certain functions by their nature must be outsourced to a third party (e.g., auditing a plan’s financial statements), while others for practical reasons have been outsourced by most plan sponsors (e.g., defined contribution recordkeeping). In addition, there appears to be an emerging trend toward outsourcing functions that have traditionally been exercised by plan sponsors or other employer fiduciaries (e.g., administrative committee, investment committee, etc.), including functions such as investment fund selection, discretionary plan administration, and investment strategy. There also have been trends towards using multiple employer plan structures as a mechanism to “outsource” the provision of retirement plan benefits particularly in the small company market.
For both plan sponsors and outsourcing service providers, a key question is the allocation of legal responsibilities and risk for activities of the service provider on behalf of the plan. This includes both responsibilities imposed by ERISA itself as well as responsibilities allocated and risks assumed by contract. This allocation of responsibilities and risk is not always well understood by plan sponsors and other employer fiduciaries. This may lead to misunderstandings on the part of plan sponsors and other employer fiduciaries as to what their legal responsibilities (including under ERISA) continue to be notwithstanding the “outsourcing” decision, inaccurate pricing of services, and, ultimately, disputes between plan sponsors and service providers. While the Department of Labor (“DOL”) has issued guidance in several areas regarding both plan sponsor and service provider responsibilities, there is no uniform analytical framework for understanding outsourcing, particularly in the context of fiduciary services.
Objective and Scope
The Council is examining this topic and intends to draft recommendations to the Secretary of Labor for consideration. Our study will focus on:
- Identifying current industry practices and trends regarding the types of services being outsourced (both fiduciary and non-fiduciary) and the market for delivery of those services, including differences in outsourcing practices by type of provider, plan size or plan type;
- Clarifying the legal framework under ERISA for retaining outsourced service providers, including both plan sponsor and service provider responsibilities, and suggest areas where further DOL guidance might be helpful;
- Making recommendations to DOL about current best practices in selecting and monitoring outsourced service providers, including identification of performance standards, benchmarking of costs and mitigating conflicts of interest;
- For fiduciary services, exploring the differences between status as a fiduciary under ERISA section 3(16), 3(21) and ERISA section 3(38) and the scope of co-fiduciary liability in the outsourcing context;
- Identifying current contracting practices with respect to outsourced services, including provisions such as termination rights, indemnification, liability caps, service level agreements, etc. that might assist plan sponsors and other fiduciaries in negotiating service agreements;
- Examining insurance coverage and ERISA bonding practices of outsourced service providers to assist in understanding the extent to which risks are shifted from plan sponsors and other fiduciaries to service providers.