In the July 2009 issue of EBN, I argued that employers should junk their 401(k) in favor of a nonparticipant directed plan.

Part of the strategy I advocated was hiring a professional fiduciary to take over both the administration and investment responsibilities of the 401(k). Here, I elaborate on the process of getting out of the retirement plan business by sponsoring a plan but not managing it.

Ever since the Employee Retirement Income Security Act of 1974, plan sponsors have been able to delegate not only all their fiduciary responsibilities but also their liabilities to a professional fiduciary.

Plan sponsors retain a residual final responsibility in the selection and monitoring of the fiduciary. This delegated fiduciary is a prudent delegate that plan sponsors can fire anytime. Thus, plan sponsors never lose control of their retirement plan.

Everyone benefits when companies exit retirement plan business

Both investors and management benefit when a company gets out of the retirement plan business. Shareholders benefit from freeing up company resources that either can be let go or reallocated to core business activities.

Management, meanwhile, benefits by escaping the various burdens and liabilities ERISA imposes on plan sponsors (i.e., executives) who run their own plan, such as the standard of trust law, the prudent man rule and personal liability.

Employees also gain from this move. A professional fiduciary is more likely to offer plan participants investment options that are lower in cost and broader in diversification of risk (e.g., passively managed index funds) than what the retirement plan industry normally offers.

I suggest HR/benefits pros take a serious look at the nonparticipant directed plans offered through a professional fiduciary.

Intent of ERISA

Some professionals in the retirement plan business have interpreted the original intent of ERISA as advocating exactly this strategy of offloading retirement plans onto professional fiduciaries.

In the October/November issue of Morningstar Advisor, W. Scott Simon, an accredited investment fiduciary analyst, argued that "ERISA was designed originally with the overarching thought that qualified retirement plans such as a 401(k) plan were to be run by professional fiduciaries, not by plan sponsor executives with little (or no) experience (much less time or interest) in running a plan. The many sections of ERISA that grant fiduciary delegating authority attest to this."

Before stating the process of hiring and transferring responsibilities to a professional fiduciary, it's important first to understand the logic of how a 401(k) plan allocates responsibility for its administrative and investment functions.

ERISA imagines that a plan's sponsor - often a board of directors created for that purpose - first adopt a qualified retirement plan.

After adoption, the plan's sponsor appoints a fiduciary or fiduciaries to operate the plan. Assuming a prudent appointment, the plan's sponsor no longer has to worry about managing it.

Third-party fiduciaries

Typically, the appointed fiduciaries are in-house executives.

However, ERISA allows the appointment of independent third parties like banks, trust companies, insurance companies or registered investment advisers, if done in a prudent manner. In fact, a plan sponsor can delegate all discretion, covering both administrative tasks and investment functions, to the professional fiduciary.

Once plan sponsors give up discretion they have no responsibility, except for the monitoring function and thus no liability.

This decision also protects company executives from all fiduciary investment and operational/administrative risk that running a qualified plan subjects them to.

Offering company stock to employees

One interesting application of this strategy is in protecting a company that wants to offer its stock to employees as a retirement investment option. A natural conflict of interest arises in this case between employer with fiduciary responsibilities to stockholders and employer as plan sponsor with fiduciary responsibility to plan participants.

Plan sponsors in this case can hire an independent fiduciary for just this investment option and let the fiduciary decide whether the company's stock should be included in the company's 401(k) plan and furthermore make all hold/sell decisions.

This strategy effectively allows a company to shield itself from liability concerning the inclusion of its own stock in its 401(k) plan.

One final observation: The nonprofessional fiduciary service provider your company is probably using - while excellent at providing you with retirement tools, products and information that assists in managing your 401(k) - isn't shouldering any of your company's fiduciary responsibilities.

You're paying for all this assistance by exposing your company to possible losses following litigation over an ERISA rule violation. Some nonprofessional fiduciaries' service providers claim to be co-fiduciaries. Nothing in ERISA mentions co-fiduciaries.

At least among many professional fiduciaries, the idea of your nonprofessional fiduciary service provider being a true co-fiduciary is just a marketing ploy.

Contributing Editor Mark Nadler is an economist and professor at Ashland University in Ashland, Ohio. He is a member of The Financial Education Co. and president of Vincuro, a financial stress reduction firm.

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