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Regulation and Compliance > Federal Regulation > DOL

DOL Fiduciary: Outsourcing Offers Small Firms a Lifeboat

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It’s safe to say that the recently finalized Department of Labor (DOL) fiduciary rule has left the retirement planning industry reeling.

When combined with the new DOL requirements, the threat of increased fiduciary liability has advisors and clients alike wondering where the industry as a whole is heading. For small businesses that sponsor retirement plan and health savings account (HSA) options for their employees, the primary focus going forward will likely be on mitigating the heightened risks presented by the expansive DOL fiduciary standard—especially in light of the recent surge in litigation alleging breach of fiduciary duties by plan sponsors. 

These new developments have caused the spotlight to focus on what is likely to be the next big trend in retirement related advisory services—the mitigation of risk through outsourcing fiduciary duties.

Fiduciary Outsourcing: The Basics

Outsourcing fiduciary responsibility essentially allows those who would otherwise be categorized as fiduciaries to contract with a third party in order to shift at least a part of the risk of fiduciary liability to that third party. While these services have been available in the past, since the DOL has broadened the fiduciary role to include most financial advisors and plan sponsors, new and expanded outsourcing options have surfaced and are expected to become much more popular.

The roles that may be outsourced vary based upon the firm that provides the services. For example, some firms offer what are known as 3(38) investment fiduciary services (named for the relevant ERISA section 3(38)), pursuant to which responsibility for choosing and altering a plan’s investments is outsourced to registered investment advisors.

Others offer 3(16) fiduciary services, which include administrative duties such as fulfilling a plan’s reporting and disclosure requirements that are traditionally performed by the plan sponsor.  Importantly, a 3(16) fiduciary is responsible for filing a plan’s Form 5500 (the requirements for which have recently been amended and expanded), and accepts liability under ERISA for any delinquent or erroneous filings.

A 3(21) outsourcing arrangement allows the plan sponsor to share in the investment selection process—generally, the plan sponsor makes the ultimate decision regarding investment selection from a set of recommendations developed by the third party firm.

Despite the fact that outsourcing some of a plan sponsor’s fiduciary duties can help mitigate the risk of increased fiduciary liability, those who are originally responsible cannot completely eliminate their fiduciary duties to the plan. Importantly, the plan sponsor is responsible for selecting and monitoring the third party firm in a prudent manner (meaning that the plan sponsor should have a procedure in place for evaluating the firm at reasonable intervals).

The DOL Fiduciary Rule Risk

Sponsoring a retirement plan or health savings account (HSA) will generally cause the sponsor to fall under the DOL fiduciary rule umbrella, meaning that the plan sponsor will become subject to an increased risk of liability for the investments made within these accounts.

An advisor will become subject to the fiduciary standard if he or she makes a recommendation about the advisability of holding, acquiring, disposing or exchanging an investment, or makes a recommendation as to investment management of plan assets.

The definition of “recommendation” becomes important in this context, and essentially means a communication that, based on its content, context and presentation, is reasonably viewed as a suggestion that the client engage in (or refrain from) taking a particular course of action. Whether certain advice constitutes a recommendation will require an objective, rather than subjective, inquiry.

The best interests contract exemption can be used so that advisors may continue to receive compensation when potential conflicts of interest are disclosed to the client and a formal written contract is executed that commits the advisor to act in the client’s best interests (among other requirements). Exemptions also exist to allow advisors to provide investment education services or for those who operate on a level fee basis.


Despite the potential exemptions that are available, the threat of increased fiduciary liability is real—especially in the small business context, where a business owner may take on plan investment responsibilities without sufficient training. For these clients, the outsourcing option may significantly mitigate the risks associated with the new DOL fiduciary standard.

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Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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