Look what happened to the role of theplan sponsor. (Photo: Shutterstock)

Back in the stone ages, once companies reached a certain size,they were obligated to provide a retirement plan. They needed to offer thepromise of a worry-free old age in order to compete with othercompanies for workers.

The promise didn't have to actually be fulfilled. Indeed, therewere so many employment provisions in traditional pension plansthat far fewer retirees realized the benefits promised them thanmany today assume. Still, pensions became such a liability thatcompanies – as a result of shareholder behavior – sought to ensuresustainability by replacing defined benefit plans with definedcontribution plans.

While this shift did help from a corporate finance standpoint,it failed to reduce the fiduciary liability of the plansponsor.

That all began to change when companies discovered theregulatory environment had begun to allow at least some of thisliability to be delegated to service providers (q.v., 401(k) Fiduciary Solutions: Expert Guidance for401(k) Plan Sponsors on How to Effectively and Safely Manage PlanCompliance and Investments by Sharing the Fiduciary Burden withExperienced Professionals).

Soon it became apparent to plan sponsors they could chooseexactly how much and which portions of their fiduciary liabilitythey could legally delegate (see "What Do Most 401k Plan Sponsors Use: a 3(38) or a3(21) Adviser?" FiduciaryNews.com, August 20, 2019).

It is this evolution of delegation that bears interest. It helpsto explain what we've seen in the retirement plan industry.

It may also help us understand where the industry will gonext.

In the beginning, there was the profit-sharing plan (we're goingto skip ahead past the pension plan era). The plan sponsor wouldhire a Registered Investment Adviser (or a bank trust department)to oversee the investment portfolio. The plan sponsor would remainresponsible for determining (with the help of an accountingprofessional) the demographic trends of the plan participants. Theplan sponsor would then be held accountable for transmitting thatinformation to the RIA and then monitoring the activity of the RIAto make sure the profit-sharing plan was invested properly.

You can see there's a lot of moving parts here when it comes tofiduciary liability.

The attraction plan sponsors had toward the novel idea of a401(k) plan had to do with removing some of that fiduciaryliability. In exchange for placing at least three distinctinvestment options on a menu employees could pick from, the plansponsor was given safe harbor (to an extent).

At first, plan sponsors picked the RIA to manage these threeportfolios much in the same way they selected portfolio managersfor their profit-sharing plans. This didn't change the situationthat much, and plan sponsors remained on the hook for learning theinvestment management business.

Then along came an opportunity for plan sponsors to take on apartner, a co-fiduciary. This is the 3(21) option. The plan sponsorretained the responsibility for the ultimate decision, but an RIAwas there riding shotgun, vetting all the investment options.

For plan sponsors, the world got a little better. But not muchbetter.

Then came the understanding that this fiduciary liability didn'tneed to be shared, it could be off-loaded. This is the 3(38)option. Here the plan sponsor hands the keys to the car to the RIA.Sure, the plan sponsor couldn't delegate all of the fiduciaryliability, but 3(38) takes away the bulk of it.

This was a quick recap. Most know all the details. It's the30-thousand-foot level, however, that bears attention.

Look what happened to the role of the plan sponsor.

Rather than focus on "plan sponsor" as an amorphous entity, ithelps to recall that it is corporate executives within the C-Suitethat are tasked with doing the real work in maintaining thecompany's retirement plan. These are the same people tasked withmaking sure the trains run on time at the shop.

In fact, they don't get paid if the trains don't run ontime.

Put your feet in those shoes. You have an incentive to get thosetrains running with all their might. You're amped up to do it. Youwant to devote all your time to doing it.

But then you're handcuffed by this corporate retirement plan.Worse, not only does it not have an upside, but it has a veryunhealthy (for you) downside.

If you had the chance to reduce that downside, wouldn't you leapat it?

And if you had the chance to eliminate that (but still keep theplan), why, that would be Nirvana.

Do you see where this is going? Do you now see where theindustry is going?

It's best to hop on that train before it leaves the station.

READ MORE:

What do you do when you witness aplan sponsor fiduciary breach?

The 'Fiduciary Rule' versus the 'Rule of Fiduciary'— Carosa

Do you have the 'knows' to be a fiduciary? —Carosa