Many plan sponsors and plan committees members (i.e., plan fiduciaries) don’t realize that they are fiduciaries, or they don’t fully appreciate a fiduciary’s personal liability, says Brian Lakkides, managing director for Fiduciary Plan Governance LLC. Lakkides, along with other plan compliance experts, took a deep dive into fiduciary liability and education during the second day of the 2014 NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans.

It will be important for advisers to track the impact of new fiduciary rules on contracts with service providers that may gain fiduciary liability under rule changes from the Department of Labor (DOL) and other regulatory groups. Equally important is providing education for sponsor and plan committee clients on the basics of fiduciary liability and responsibility.

The DOL is considering expanding the definition of fiduciary to cover more types of service providers and advice relationships (see “New Restrictions Loom for IRA Rollovers”). Alongside other federal regulatory bodies such as the Securities and Exchange Commission (SEC), the DOL expressed concern that converging business models and the widening use of technology may cause conflicts of interest not currently addressed by the Employee Retirement Income Security Act (ERISA) and other regulations.

While the pending rule changes have created endless speculation and discussion among advisers and broker/dealers, Lakkides says, corporate staff and executives are simply too busy with daily responsibilities to follow the matter closely. And many sponsors don’t even fully understand existing service provider agreements that determine how their plans are run and what expenses are paid, let alone the minutiae of how new conflict of interest rules and prohibited transaction provisions might change those agreements.

Using statistics from Koski Research and Charles Schwab, Lakkides says 30% of senior finance and human resources executives believe their company’s 401(k) plan is free to administer. Nearly 70% of participants believe the same, he says.

“We’ve found that most plans in this still-distorted marketplace are paying 20% to 60% more than necessary compared to plan services being priced using a fully transparent cost-plus methodology,” Lakkides explains. “It is part of the adviser’s value proposition to help cut down on those percentages.”

Lakkides says the problem stems in part from the “delegation fallacy,” which emerges from ERISA provisions that require plan fiduciaries who lack the expertise and capabilities required to carry out fiduciary duties to “engage experts who have the requisite skill, knowledge and experience needed by the plan.”

Many sponsors and other fiduciaries interpret these provisions to mean that, by outsourcing administrative work related to monitoring plan performance and expenses—as many decide to do—fiduciaries thereby outsource the related liability. This is simply untrue, Lakkides says, yet many sponsors believe they can turn completely away from daily plan administration once these functions have been outsourced.

“While you can outsource your responsibility for conducting certain functional elements of your fiduciary duty, you can never fully discharge the fundamental responsibility of ‘surveillance and oversight’ and the ‘avoidance of conflicts of interest,’” Lakkides says. “So you remain liable to a large extent for the services you outsource.”

This is true under all the most familiar fiduciary outsourcing arrangements, he says, such as 3(16), 3(21) and 3(38). These may help a sponsor reduce certain liabilities and should save substantial time and energy in compliance efforts, but the fundamental liability of surveillance and oversight remains. It is also critical for fiduciaries to understand co-liability provisions under ERISA, he says, which can hold “innocent” fiduciaries liable for breaches by other named or unnamed fiduciaries.

Another common misunderstanding among plan sponsors, Lakkides says, is what the ERISA “prudent man” rule implies about the level of expertise required of fiduciaries. Many sponsors take this standard to mean plan-related decisions must be made by someone as prudent as the average person: in other words, they must carefully consider the decision, but are not necessarily expected to grasp all the factors or potential outcomes.

Again, not so, says Lakkides. ERISA’s prudence standard is not that of a prudent layperson, but rather that of a prudent person dealing frequently with retirement plan matters. The bottom line is, plan trustees and committee members must be as prudent as the average fiduciary expert—not the average person.