The Department of Labor (DOL) and the Securities and Exchange Commission (SEC) jointly released tips for plan fiduciaries on selecting and monitoring investment consultants. In addition, the DOL previously released general guidance for plan fiduciaries on selecting and monitoring employee benefit plan service providers, such as recordkeepers. Below is a summary of the guidance along with suggestions for steps plan fiduciaries should take.
Many fiduciaries who are responsible for the management of plan assets engage investment consultants for advice. For example, an in-house investment committee responsible for the management of 401(k) plan assets may engage an investment consultant to advise the committee on the type of investment options and the particular investment funds to be offered under the plan. A fiduciary responsible for managing pension plan assets may engage an investment consultant to assist the fiduciary in setting the plan’s asset allocation strategy and selecting and monitoring investment managers.
As a result of its investigations into the practices of investment consultants, the SEC released a staff report raising questions about whether investment consultants adequately disclose potential conflicts of interest that may affect the objectivity of their advice to plan fiduciaries. The SEC particularly focused on the potential for conflicts of interest with so-called "pay to play" arrangements under which investment consultants receive compensation from money managers or brokers in exchange for providing access to the consultant’s plan clients. As noted in the staff report, whether a pension consultant’s relationships with other parties create a material conflict of interest depends on the facts and circumstances.
A plan fiduciary needs to understand any potential conflicts of interest that could affect the independence or objectivity of an investment consultant’s advice. To assist plan fiduciaries, the DOL and SEC jointly released a list of items for them to review with their investment consultants to evaluate the objectivity of the consultants’ recommendations. The following are some of the items the SEC and DOL suggest for review by plan fiduciaries:
- Confirm the consultant is registered with the SEC (or state securities regulator) as an "investment adviser" and review all disclosures required under those laws (such as Part II of the consultant’s Form ADV filed with the SEC).
- Ask the consultant to confirm in writing whether the consultant has a fiduciary obligation as an investment adviser and will comply with its fiduciary obligations in performing investment advice services.
- Ask if the consultant, or a related company, has relationships with money managers that the consultant recommends or otherwise mentions for selection. Also, ask whether the consultant receives any payments from brokers if money managers recommended by the consultant place trades through those brokers.
- Ask if the consultant, or a related company, receives any payments from money managers that the consultant recommends or otherwise mentions for selection. If so, ask the consultant to specify the extent of these payments in relation to the consultant’s overall revenue.
- Confirm the consultant has policies or procedures to address conflicts of interest which may affect the advice provided by the consultant and review these policies.
- If applicable, confirm the procedures for monitoring payments of the consultant’s fees from brokerage commissions paid by the plan to ensure the plan does not overpay for the consultant’s services.
These questions should be included in any request for proposal (RFP) for a new investment consultant. As part of their duty to monitor the investment consultant, plan fiduciaries should also consider whether these questions should be submitted in writing to an existing investment consultant.
General Guidance on Service Providers/RFP Process
The DOL released general guidance to assist plan fiduciaries in the selection and monitoring of employee benefit plan service providers, such as recordkeepers, actuaries and third-party administrators. The guidance encourages plan fiduciaries to engage in a detailed dialogue with each proposed service provider regarding the plan, the plan’s service needs and the service provider’s specific capabilities and qualifications to meet those needs. To fulfill its obligations, the plan fiduciary may wish to use a written RFP process when selecting new benefit plan service providers. A similar process could be used for existing service providers at the time of contract renewal.
RFPs customarily describe services to be provided by the service provider, as well as the allocation of responsibilities between in-house plan administrators and the service provider. In addition to customary RFP questions concerning the services to be provided, there are a number of legal points that should be addressed in an RFP for a new service provider. Among the general legal items are:
- Representations and warranties by the service provider for the performance of its services (e.g., compliance with plan rules, compliance with applicable law)
- Terms for indemnification of the plan, the plan sponsor, the plan administrator and the plan sponsor’s employees as well as the service provider’s insurance coverage
- Limitation of liability provisions
- Contract termination events and termination fees (if any) for both "for-cause" and for "convenience" terminations
- Plan rights to materials developed in the course of performing services for the plan
- The service provider’s use of subcontractors and the service provider’s liability for the actions/omissions of its subcontractors
- Performance standards for the service provider and liquidated damages ("penalties" or fee reductions) for failure to attain such standards
- The specific services contemplated by the agreement (as allocated between the employer or in-house plan administrator and service provider)
- Any litigation involving the service provider
Any actions or complaints against the service provider for breach of fiduciary duty or other misfeasance
The above items are intended to allow the plan fiduciary to confront contractual issues early on in the RFP process. Tackling these issues early should help avoid protracted negotiations of the service agreement or last-minute surprises about contract terms (e.g., services the plan fiduciary thought were covered in the fee quote but for which an extra charge will be imposed).
Many service providers offer plan fiduciaries standard agreements for their services. These standard agreements may not adequately address all the areas of concern to a plan fiduciary (including those items mentioned above). Therefore, it is important for plan fiduciaries to review such agreements in light of the factors listed above, as well as specific plan design needs.