Vanguard Discontinues DB Plan Admin Services

Investment management firm Vanguard announced it will cease offering administration services for defined benefit (DB) retirement plans.

The firm will continue to provide DB plan sponsors with its low-cost investments, trustee and payment services, and investment advisory services. The change will enable the firm to further expand its services for 401(k), 403(b), and other defined contribution (DC) retirement plans.

“A key part of Vanguard’s mission is to help plan participants achieve the best possible retirement outcomes. We believe we can maximize our impact on the retirement security of U.S. investors if we focus on recordkeeping, investments and associated services for DC plans—the dominant type of workplace retirement program in this country today—as well as investments and other services for DB plans,” says Chris McIsaac, managing director of Vanguard’s Institutional Investor Group, based in Valley Forge, Pennsylvania.

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Vanguard currently provides administration services for the DB plans of a small group of its DC clients. The company will work with these plan sponsors to help them transition to a new DB administration provider. According to McIsaac, the decision to discontinue offering DB administration occurs in the context of a challenging economic, market and demographic environment that has led to a significant contraction in the DB marketplace and limited the company’s ability to reach the economies of scale necessary for continued investment in such a capital-intensive offering.

According to an announcement by Vanguard, the firm is also investing considerable resources in technology to serve DC plan sponsors, including a major investment in its plan sponsor workstation that delivers enhanced web-based management, analytics and reporting tools. It is also building integration technology to enable participants to easily access their DC and DB retirement information, in cases where some of their plans are administered by another provider.

Vanguard is also enhancing its education and communication capabilities to help improve the retirement outcomes of participants. It has introduced new functionality for mobile devices and personalized interactive tools that incorporate behavioral finance concepts. Some of these tools include: a recently announced partnership with HelloWallet, an online service that helps participants make holistic financial decisions; an online Savings Dial, which recommends a savings increase and enables participants to set a new savings rate with one click; and online Retirement Alerts, which encourage participants to use certain investment advice services if offered within their DC plans.

In addition, Vanguard is expanding into the small business market. In 2012, the company launched its 401(k) service for small businesses, Vanguard Retirement Plan Access, for sponsors of 401(k) and profit-sharing plans with assets of up to $20 million, as well as to advisers who sell fee-based 401(k) plans and to third-party administrators.

Ways to Limit Fiduciary Liability—Part I

It’s a core mission for financial advisers: work tirelessly to reduce their plan sponsors’ fiduciary liability. But what about their own liability?

The first thing advisers should do is determine their fiduciary role with the plan, says Ary Rosenbaum, principal of the Rosenbaum Law Firm. An attorney who specializes in the Employee Retirement Income Security Act (ERISA), Rosenbaum tells PLANADVISER registered investment advisers (RIAs) have different levels of fiduciary responsibility. “You want to make sure you’re not offering a service that’s not consistent with the agreement with the plan sponsor,” he says.

RIAs can provide 3(21) or 3(38) services, which vary in their fiduciary responsibility. A limited scope ERISA 3(21) fiduciary does not have the same discretionary control as an ERISA 3(38) fiduciary, Rosenbaum says. That control carries more liability. Rosenbaum recommends advisers review their processes and their contractual terms with clients.

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Offering less service than is specified is an obvious problem, but so is offering more service, Rosenbaum says. “More service equals more liability, and you’re not charging for it,” he points out. Contractually offering more and delivering less is also bad, because the client may find that out and realize the adviser is violating the terms of the contract.

Have the right insurance, Rosenbaum warns. Advisers should check to see if their liability insurance will cover the expanded role and liability that comes with being an ERISA 3(38) fiduciary. It is common for advisers to find out that their current liability coverage does not cover that role, he says. 

Remember the IPS

Drafting an investment policy statement (IPS) for the plan is critical, according to Rosenbaum. Picking mutual funds is not the most important part of being financial adviser to a retirement plan, he says; it is minimizing your client’s fiduciary responsibility as a plan sponsor. “The first line of defense is helping them develop an IPS."

This statement is designed to guide the plan sponsor as it decides, along with the plan adviser—if the adviser is a 3(38) fiduciary—the investment options to include in the plan, and to evaluate the performance of those investments over time. The IPS should also be shared with plan participants to help them understand why investment options are included or excluded, to provide diversification, reduce risk and keep fees low.

Another thing advisers can do to limit their potential liability is to document everything. “Take notes and minutes for meetings with your clients and detail what was discussed,” Rosenbaum advises. “Document any decisions made about plan investments and the IPS. If you offer investment education to plan participants, always have a sign-in sheet. Keep copies of investment education materials handed out at the meeting and any correspondence that advertised that meeting.”

Rosenbaum points out the adviser’s role is to help the plan sponsor with the fiduciary process. “If you can document that you did your job in a reasonable manner, it’s less likely any court would find you breached your duty to the plan sponsor,” he says. “Good recordkeeping can go a long way in confirming you did a more-than-reasonable job as the plan’s financial adviser.”

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