WHAT ARE SOME CONSIDERATIONS INVOLVING AFFILIATED INVESTMENT OPTIONS MADE AVAILABLE BY A RECORDKEEPER ?
From an ERISA prudence perspective , plan fiduciaries should select a plan ’ s investment options after considering all available investment options made available on a recordkeeper ’ s platform . Importantly , there is nothing improper about plan fiduciaries selecting investment options managed by the recordkeeper ’ s affiliate . 9 In fact , a plan recordkeeper may price its recordkeeping services in a manner that takes into account revenue that would be generated from a plan ’ s inclusion of affiliated funds in the plan ’ s investment line-up . In this case , the plan ’ s inclusion of funds affiliated with the recordkeeper may result in a lower recordkeeping fee for the plan .
It would be a mistake for plan fiduciaries to reflexively exclude the recordkeeper ’ s affiliated funds from consideration for inclusion in the plan ’ s investment lineup based on an aversion to potential conflicts that may not actually exist . Some plaintiffs have attempted to argue that a plan recordkeeper acted as a fiduciary ( and engaged in a self-dealing act ) by including affiliated funds among the funds made available to its client plans . However , offering a “ Big Menu ” of available funds from which plan fiduciaries select a smaller menu of funds for inclusion in the plan ’ s investment lineup — the “ Small Menu ” — should not give rise to fiduciary status on the part of the plan ’ s recordkeeper . 10
From the perspective of plan fiduciaries that do not have any affiliate connection to the plan ’ s recordkeeper , the plan fiduciaries ’ selection of funds affiliated with the plan ’ s recordkeeper does not raise any potential conflicts unless there is some quid pro quo arrangement , such as an agreement that the recordkeeper will provide non-plan services at a discount if the plan fiduciaries agree to include the plan recordkeeper ’ s affiliated funds in the plan ’ s investment lineup . Absent such unusual and improper situations , plan fiduciaries are unlikely to face potential legal liability for selecting funds affiliated with the plan ’ s recordkeeper if the plan fiduciaries could demonstrate through contemporaneous records that the selected fund satisfied a prudent selection process that compared available funds based solely on their economic merit . 11 Based on these considerations , plan fiduciaries should not disfavor inclusion of the plan recordkeeper ’ s affiliated funds in the plan ’ s investment lineup and should , in fact , consider whether there are benefits to their inclusion such as a potential discount on recordkeeping fees .
9
See Hecker v . Deere & Co ., 556 F . 3d 575 , 586 ( 7th Cir . 2009 ).
10
See Santomenno ex rel . John Hancock Tr . v . John Hancock Life Ins . Co . ( U . S . A ), 768 F . 3d 284 , 295 ( 3d Cir . 2014 ).
11
See 29 C . F . R . § 2550.404a-1 ( plan fiduciaries ’ consideration of plan investments “ must be based only on pecuniary factors ” that are “ expected to have a material effect on the risk and / or return of an investment ”).
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