Expert Q&A on Outsourcing Fiduciary Investment Responsibilities

February 7, 2014

Practical Law logo newAn expert Q&A with David N. Levine and Allison Tumilty of Groom Law Group, Chartered and Practical Law Employee Benefits & Executive Compensation on issues employers should consider when outsourcing fiduciary investment responsibilities.

Allison TumiltyAs retirement plans have become more complex, plan fiduciaries have started to outsource responsibility for selecting and overseeing plan investments by retaining a professional investment service provider. This decision is subject to scrutiny under the fiduciary responsibility and prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Fiduciaries who outsource their investment responsibilities to third-party service providers must do so prudently, considering the interests of the plan and its participants, and in a manner consistent with the terms of the plan documents.

Investment management outsourcing can take different forms, such as:

  • Naming an investment management firm in the plan document as the plan’s named investment fiduciary and providing the investment management firm with broad responsibility for determining investment policy and asset allocation, and for hiring and firing investment managers to implement the investment policy and strategy.
  • Retaining an investment management firm. For example, plan fiduciaries might retain authority to approve the plan’s investment policy and asset allocation guidelines, to be implemented on a discretionary basis by an investment management firm as a “manager of managers.”
  • David LevineAllocating a portion of plan assets to an investment management firm to act as a manager of managers for a portfolio of alternative assets. As a discretionary manager of plan assets, the investment management firm is a fiduciary under ERISA.
  • For participant-directed plans, hiring an investment management firm to select and monitor the designated investment alternatives offered to plan participants under the plan, and depending on investment performance, changing the designated investment alternatives as needed.

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