We have previously discussed the role of fiduciaries in an employee benefit plan, but now we need to discuss the fundamental concept of overreliance.
When you get a haircut, do you solely rely on the hairstylist to know what you want? Do you close your eyes once you sit in the chair and not look in the mirror until you get home? For most people, the answer is no. It is common to let the hair stylist know what type of cut you want or you might ask for their expert opinion on what cut fits you the best. Also, most people will observe the haircut through a mirror to monitor the service and provide feedback as necessary.
When you order take-out or go through a fast-food drive through, do you assume they provided you with the correct order or do you take a few seconds to double check before you leave? There are exceptions to almost every rule, but most people will take a few seconds to check to make sure they received what they ordered. I can admit, there has been a time or two where I relied on their service and once I got home, I noticed the order provided was not what I requested. This has always reminded me it is optimal to oversee the services/goods provided before giving my final approval and heading home.
In both of the above situations, you entered into a service agreement under which you compensated the provider for their expertise and services/products. In both situations, normally you are identifying, monitoring, and detecting risks throughout the service agreement (essentially a collection of fiduciary responsibilities), so why not do that for your retirement plan service providers? Arguably, there can be much more severe repercussions from not performing your fiduciary responsibilities in your retirement plan than the two examples noted above. Okay, okay, it could be argued that a bad haircut could be more severe then significant fines and potential loss of your retirement plan’s tax-exempt status, but I wouldn’t know since I don’t have any hair!
Most likely there are other real life examples where you relied on a service provider and were disappointed with the results for one reason or another. A service provider in an employee benefit plan such as a third-party administrator, recordkeeper, etc., has the same potential to disappoint and make mistakes as the service providers you encounter in your personal lives. Services providers are human, and mistakes will happen, but can be mitigated with a strong review and monitoring process.
Years ago most retirement plans had all transactions, elections, and requests on paper with physical signatures. In today’s environment, plans have shifted to an electronic environment where the Plan Sponsor is not even required to push a button for certain transactions to execute. This is generally a result of plans entering into a bundled agreement where a service provider is a combination of the custodian, trustee, third party administrator, recordkeeper, and investment advisor. Usually in these circumstances, participants interact directly with the service provider to request transactions such as loans, distributions, rollovers, etc. In most cases, the service provider will review and approve these transactions and the Plan Sponsor does not have to be involved in the process. These situations have contributed to a lack of mandatory fiduciary responsibilities being performed.
We understand why overreliance occurs and why you might feel frustrated when service providers make mistakes. You are compensating a service provider to provide a specific set of services. You most likely selected the service provider due to their expertise in the industry. If you are entering into an agreement for a specific set of services and believe the service provider is an expert in the industry, then why would you anticipate them making mistakes or why should you have to review and monitor their work? Although we understand this mindset, it is important to know that if there is a compliance issue in your plan, the DOL is going to be knocking on your (the fiduciary) door and not the service provider’s. Noncompliance can result in heavy fines, corrections, and potential termination of a plan depending on the severity. While your plan is accruing fines and scrutiny from the DOL, the service provider is untouched and is continuing their day-to-day operations without a blemish. You might complain, write a bad review, or terminate your service agreement with the service organization, but the qualitative and quantitative impact on the plan can be severe. A sometimes forgotten fact is that the vast majority of vendor agreements include a “hold harmless” provision such that the Plan Sponsor basically absolves them of any error they cause. At the end of the day, the fiduciaries of the plan have the ultimate responsibility for the plan and need to make sure there are proper monitoring and review procedures in place.