Council Examining Practices for Outsourcing Plan Services

The Department of Labor’s (DOL) ERISA Advisory Council is examining practices for outsourcing employee benefit plan services.

In an issue statement, the council notes that certain functions by their nature must be outsourced to a third party, while others are outsourced for practical reasons, but there is an emerging trend toward also outsourcing functions that have traditionally been exercised by plan sponsors or other employer fiduciaries, including functions such as investment fund selection, discretionary plan administration and investment strategy. In addition, the council says, there’s an emerging trend towards using multiple employer plan structures as a mechanism to “outsource” the provision of retirement plan benefits particularly in the small company market.

According to the council, outsourcing plan services presents questions about the allocation of legal responsibilities and risk for activities of service providers on behalf of plans, including responsibilities imposed by the Employee Retirement Income Security Act (ERISA) and responsibilities allocated and risks assumed service contracts. The council contends the allocation of responsibilities and risk is not always well understood by plan sponsors and other employer fiduciaries and they may misunderstand what their legal responsibilities continue to be when services are outsourced.

“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,” the council says in its issue statement. The council intends to draft recommendations to the Secretary of Labor for consideration.

It says its examination 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; and
  • 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.

The American Benefits Council (ABC) urged the ERISA Advisory Council to avoid adding an additional layer of complexity for retirement plan sponsors.

“We respectfully request that the DOL take caution to not add another layer of complexity related to plan sponsors’ decisionmaking as it pertains to the procurement of plan-related services from suppliers and vendors who reside outside the company,” Allison R. Klausner, assistant general counsel for benefits, Honeywell International Inc., said in testimony before the council, speaking on behalf of ABC.

“The Council would support DOL initiatives with regard to outsourcing work relating to the delivery of employee benefits, but only so long as it is not one that limits the freedoms of the plan sponsor to make corporate decisions that fit its corporate culture and the personality and needs of its workforce,” she added.

Klausner told the council about the process Honeywell uses to select outsourcing providers, but noted while the system works well for her firm, every company is different. “Any government initiative in this area should permit continued flexibility for American companies as they provide benefits to their workers and retirees in an effort to support their collective health and financial well-being,” she said.