As I sit here reviewing an investment advisory agreement this morning on behalf of one of our ERISA 3(16) clients, I am reminded of the weight of a client’s duties – not just under ERISA – but under the obligations of the many vendor agreements they will sign on behalf of their company’s qualified retirement plan.

It is sadly rare to find a client that will read through service agreements and contracts word for word – but upon examination of just this one agreement this morning, I am overwhelmed at the number of “the Client represents” and “the Client acknowledges” and “the Client agrees.” In signing any contract, “the Client” is attesting that it is qualified to approve the contract and that it comprehends it fully. Experience has taught me that not many signers really do not fully comprehend the ramifications of the ERISA plan service agreements they execute with vendors. And that’s dangerous because if anything goes wrong, it is on the “Client.” Let me take you for a bit of a stroll inside the service agreement I have in front of me…

A Case Study

On page 1 of this particular agreement, an investment advisory agreement like most any other I have reviewed in my fifteen years in this industry, there are at least four significant representations made by the Client in signing the agreement.

1. The advisor will provide performance information so as to ASSIST the Client with the ability to determine progress toward investment objectives. In this type of an arrangement, which is written as an ERISA Section 3(21) agreement, the word ASSIST is significant. It means that while there will be help ultimately the Client bears the fiduciary responsibility for the plan’s investment decisions, not the advisor. Simply, where there is “discretion to determine” – there is liability.

2. The Client shall be responsible for monitoring compliance with their investment policies and guidelines. That is quite clear. The Client shall be responsible. So, how will you go about monitoring compliance now that you have legally attested to understand 1) that you are responsible and 2) that you are qualified for that task?

3. The advisor shall not be responsible for the accuracy of the information supplied by the client. This is a standard line you will find in most any service agreement that is likely overlooked, but it is HUGELY SIGNIFICANT. Data is where most all retirement plan troubles come to bear. Most litigation occurs because no one is watching the data. Numbers, letters, names, dates, amounts go into the systems. Numbers, letters, names, dates amounts spit out of the systems. Most agreements indicate that the Client is solely responsible for ensuring the accuracy of data; names, dates, contribution amounts, loan payments – and that all of this data is accurate per what is specified in the plan document. If something is wrong with that data, it will not be a recordkeeper, or TPA, or custodian, or advisor issue – it is on you the Client.

4. The advisor will not be responsible for determining whether the asset class selected by the client meets eligibility requirements for a QDIA. This is a big one for a number of reasons. 1) When a sentence starts with “the service provider will not be responsible for…” that is a clear indication that it is the other party to the contract who WILL be responsible for. In this advisory agreement, that’s you Client. 2) Now that we’ve established who is responsible for…let’s talk about WHAT you, Client, are responsible for…determining whether. There is that word “determination” again. As I said before, where there is “discretion to determine” – there is liability. You, Client, are legally liable for this determination. Pay attention. 3) You, Client, are responsible for determining “whether the asset class selected meets the eligibility requirements for a QDIA.” Lots of assumptions in this statement. You understand the advisor is not responsible. You understand that YOU ARE responsible. You know what QDIA means. You know what the eligibility requirements for a QDIA are. You know how to choose an appropriate QDIA. In addition, per ERISA, you assume the responsibility to monitor the QDIA ongoing to ensure the decision remains appropriate for the plan and your participant base. QDIA is SIGNIFICANT!

This one little line from page 1 of a 10 page advisory agreement is SIGNIFICANT. The legal obligations represented in just these 4 little lines are HUGE! The obligations continue throughout the remainder of this agreement. You, Client, represent that you are the named fiduciary. That means you are the #1 responsible and liable party. You represent that your plan’s documents allow you to engage in such an agreement and in such services. You represent in signing this agreement that the fees represented herein are reasonable.

What’s the Motive?

I don’t bring these matters to light to terrify or dissuade anyone from participating in the management of an ERISA retirement plan. The positives are SIGNIFICANT! But like our participation in any other contractual relationship – there is a responsibility of ownership. If we do not read our agreements, how then can we legally assure and attest to our understanding of the obligations therein with our signature? When we sign, that is exactly what we are doing.

When our 3(16) clients engage in an activity as seemingly mundane as a service agreement review with us, they quickly come to realize the significance of having an administrative fiduciary in their corner. In fact, in some cases, WE actually sign these agreements – taking on the obligations on behalf of our clients. WE represent, WE acknowledge, WE agree and we assume the liability for ensuring that our clients ARE operating their plans according to their plan documents, that the QDIA selected DOES meet eligibility requirements, that the fees contained in this and any other service agreement ARE reasonable.

What You Should Do

I encourage you to pull out copies of your ERISA plan’s service agreements. Examine all occurrences of “the Client will,” “the Client is responsible,” “the Client represents,” “the Client attests,” “the Client warrants,” “the Client has concluded,” and “the service provider will not.”

Start with page 1. Highlight all such references. Pay attention to those items for which you have attested and assumed responsibility and liability. If you are unsure as to how ANY of those occurrences affect your fiduciary rating, call me at 1-800-440-3457. There are multiple ways in which we can help you – to be a strong, informed and successful fiduciary steward of your plan – or to take it on for you – with various levels of training and consultation in between. (Be sure you consult with an attorney on contracting terms and conditions.)

Problems are Inevitable

It is not a matter of IF something will go wrong in a retirement plan. Given the multitude of data points and transactions occurring each and every day – it is a matter of when. Non-fiduciary vendors assume none of your ERISA responsibility when they occur. Even most “fiduciary” vendors assume very limited responsibility and exposure under ERSIA. You won’t know how much help you really have, or do not have – unless you READ – and understand the implications of each of a contract’s representations.

Kristi Arthur

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