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Turning Plan Sponsors' Risk into Reward: Learning From Lawsuits

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Retirement plan sponsors face increasing regulatory scrutiny and significant liability as plan fiduciaries. Can you leverage off these fiduciary concerns and generate advisory business for your firm?

There are a couple of key approaches you can use to address sponsors’ concerns about their fiduciary responsibilities and sell to the plans and their sponsors.

Add Value for Fiduciaries

Retirement plan fiduciaries are required to expertly manage the plan. The problem is that most plan sponsors aren’t experts. In fact, some sponsors may not be aware of the full extent of their duty to plan participants. The good news for plan sponsors is that, instead of becoming an expert themselves, they can delegate their management duties to someone who is already an expert.

Believe it or not, there are a number of plans that don’t use an advisor—with the plan sponsor choosing to go it alone to save a few dollars. As reported in a previous edition of the Advisor’s Journal, a significant of number of employee retirement plans (19%) don’t use an outside investment advisor. If you and your firm have the infrastructure to act as an outside advisor to a plan, and the plan and its sponsor are willing to foot the bill, you can take the fiduciary burden from the plan sponsor’s shoulders. Of course, that means you’ll be taking on that burden yourself.

For sponsors who choose to manage the plan themselves, the cost of going it alone can overwhelm any savings on advisory fees, as illustrated by recent litigation against plan sponsors.

The Significant Threats to Plan Sponsors

Recent lawsuits involving a plan sponsor’s breach of fiduciary duty demonstrate the high cost of inexpert plan management. Are your plan sponsor clients or prospects aware of these costly lawsuits? For example, Bechtel reached an $18.5 million settlement in a suit charging the plan with failing to keep plan costs down by leveraging the size of its plan to get a better deal from vendors. The settlement forced Bechtel to seek outside investment management for at least three years. Undoubtedly, Bechtel would have saved significantly had it used an outside investment advisor’s services in the first instance.

Do you specialize in providing advisory services to plans? Do you or your associates have particular expertise in navigating the complexities of the retirement plan regulatory environment? Are you particularly experienced at dealing with vendors?

Splitting Fiduciary Risk

As much as plan sponsors who take on the full fiduciary duty would like to outsource to an outside advisor, many simply aren’t prepared to take on that additional expense. Remind those plan sponsors that utilizing your services isn’t an all-or-nothing proposition. Under ERISA and other regulations, the plan sponsor can split its fiduciary duty with you by utilizing you as a limited scope investment advisor. Using you in that capacity won’t eliminate all of the sponsor’s liability, but will allow the sponsor to selectively pass on some of that duty to you. Correspondingly, it will also allow you to select the areas where you’re most comfortable taking on responsibility for the plan.

Opportunities Presented by Underserved Plans

Plan sponsors who already understand their fiduciary duty to plan participants probably have, what appear to them to be, very good reasons for operating without outside advisory help. But plan sponsors who don’t fully appreciate their risk will welcome the information you can provide them. And once they understand the risk, they’ll better appreciate the relative value you can offer them.

Even if a plan sponsor is willing to bear the fiduciary risk of operating without a net, you may find opportunities to sell through the firm. If you or your firm service both retirement plans and individuals, your expert pitch to a plan could generate business from the plan sponsor’s owners and executives.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.

See also The Law Professor's blog at AdvisorFYI.