August 27, 2002 (www.plansponsor.com) - Plan sponsors may find themselves confronted with contracts that seek to limit vendor liability - but that won't provide a shield for employers in carrying out their fiduciary responsibilities under ERISA.

This headline summarizes the problem: You, your company, and other fiduciaries to your plan are not excused from the behavior of your vendor(s) when it comes to fiduciary liability.

Are you, or your Plan Committee:

• Monitoring and documenting the fiduciary, or non-fiduciary, behavior of your vendor?
• Have you asked If your vendors are faithful to the Exclusive Benefit Rule of ERISA? Do they consistently act in the best interests of your plan participants and beneficiaries?
• Have your vendor(s) engaging in any type of discretionary activity in investment selection/recommendation or administration of the Plan?
• Have you asked questions and documented all financial motivations which may drive your vendor(s) behavior?
• Have you obtained any independent analysis of your vendor's behavior?

There is currently substantial pricing pressure in the 401(k) industry. The decline in overall mutual fund assets, and average 401(k) participant account balances places increasing stress on 401(k) service and investment provider margins/profits.

Denali FM has seen multiple instances of vendors appearing to have acted in their own best interests, not the participants' and beneficiaries'. A number of these instances involve situations where fund 'mapping' and investment menu offerings or changes are involved. As some real-life examples:

A very sizable 401(k) plan, which operates without independent investment analysis/oversight, offers 25+ investment options, all of which are proprietary funds from their bundled 401(k) mutual fund vendor.

Upon takeover/transfer of a substantial plan, and in the absence of independent analysis/oversight of the new investment options, the bundled 401(k) mutual fund vendor mapped a substantial majority of the plan assets into the vendors proprietary funds.

A bundled mutual fund vendor agreed to offer 'outside' fund options to participants since some of the vendor's proprietary funds were not performing well. However, the vendor simply offered to add the funds to the existing menu, NOT terminate/map any underperforming funds to better performing funds.

A bundled vendor agreed to offer some outside fund options to a new client but the employee enrollment meetings provided by the vendor offered only presentations on the vendors own proprietary fund options. The outside funds were ignored in the presentation.

An independent TPA, which also housed securities brokerage representatives, has used high-cost insurance company variable annuity contracts to effect rollovers out of the 401(k).

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