5 Ways Plan Sponsors Can Manage Their Fiduciary Responsibility
Plan sponsors can choose from diverse approaches to managing their fiduciary responsibilities. Some are better than others. The five major models of fiduciary management vary in terms of how, when, and which fiduciary responsibilities are delegated.
Model 1: Bare Bones Do It Yourself (DIY)
Do-it-yourself (DIY) is the most common approach among small- and mid-sized plans. However, it comes with a big risk: Plan sponsors retain 100% of the fiduciary responsibility. Many plan sponsors using this approach believe they have delegated most or all of their fiduciary responsibility to the broker or life insurance agent who makes recommendations. However these brokers and agents often don't legally accept full fiduciary responsibility in writing for those recommendations, even if their service agreement includes a so-called "fiduciary warranty." They merely share the responsibility, leaving plan sponsors on the hook for any breaches of fiduciary responsibility.
Model 2: Partial DIY—Outsource and Partially Delegate Investment Management Responsibilities
This is often confused with the DIY model because its day-to-day workings are the same. However, there's a distinction that makes a world of difference when fiduciary breaches occur or are alleged. The provider agrees in writing to share investment management responsibility with other plan fiduciaries. This model is carried out by a qualified service provider making recommendations. Industry insiders call this the "Limited Scope 3(21) Fiduciary Model."
Model 3: Outsource and Fully Delegate Investment Management Responsibilities
In this increasingly popular model, the plan sponsor offloads even more fiduciary responsibility than in Model 2; fiduciary responsibility for investment management decisions transfers completely to the independent fiduciary. In other words, the properly qualified and appointed service provider acknowledges in writing that it will be accountable to the plan sponsor and undertake full fiduciary responsibility for all investment management decisions—and consequent liability—regarding the plan's investments. This generally includes developing and managing the plan's investment policy statement as well as selecting and monitoring investment options (often including model investment portfolios.). This is also known as the "Investment Management 3(38) Fiduciary Model."
Model 4: Outsource and Fully Delegate the Named Fiduciary Responsibilities to an Independent Fiduciary
In this model, a properly qualified and appointed independent fiduciary "steps into the shoes" of the plan sponsor to assume all of the responsibilities and liabilities formerly held by the DIY plan sponsor.
Model 5: Outsource and Fully Delegate the Named Fiduciary Responsibilities to a Fiduciary Sponsored and Managed Multiple Employer Plan
This is essentially the same as Model 4, except that the company replaces its original plan by adopting a multiple-employer plan. The new plan, as the name implies, serves as the plan for more than one company. This is the "Fiduciary Multiple Employer Plan Model." It should not be confused with the many multiple-employer plans that don't undertake fiduciary responsibility and are often a more costly and complicated version of the Bare-Bones DIY model.