If you are like most organizations, you outsource various aspects of your employee benefit plans due to (among other reasons) the ever-increasing complexity in today’s benefit plan environment. Outsourcing provides access to specific expertise and provides opportunities to reduce costs of operating your plan(s). Outsourcing also allows you to focus on your core business. Due to these reasons, there is an emerging trend to outsource functions that traditionally have been exercised by plan sponsors. Such functions include investment fund selections, investment strategy and plan administration, to name a few.
These trends raise the question of the allocation of legal responsibilities for the activities of the service providers acting on behalf of the plan. The allocation of responsibilities and risk is not always understood by both parties. While the U.S. Department of Labor (DOL) has issued guidance in several areas regarding both plan sponsor and service provider responsibilities, there is no specific guidance providing a clear framework for understanding outsourcing regarding the question above.
As a result, the DOL ERISA advisory council is examining this topic and intends to draft recommendations for the Secretary of Labor for consideration. It is expected that the topic will focus on:
- Identifying current industry trends regarding the types of services being outsourced and the market for delivery of those services;
- Clarifying the legal framework under ERISA for retaining outsourced service providers, including both plan sponsor and service provider responsibilities and suggesting areas where further DOL guidance might be helpful;
- Making recommendations to the DOL about current best practices in selecting and monitoring outsourced service providers;
- For fiduciary services, exploring the differences between status of fiduciary under ERISA Sections 3(16), 3(21) and 3(38) and the scope of co-fiduciary in the outsourcing context;
- Identifying current contracting practices with respect to outsourced services, including provisions such as termination rights, indemnification, liability caps, service legal rights that might assist plan sponsors and other fiduciaries in negotiating service agreements; and
- Examining insurance coverage and ERISA binding 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.
Please stay tuned to get much needed guidance regarding the ever-increasing trend of outsourcing benefit plan services by plan sponsors.
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