Two law firms have issued reminders that plan sponsors are ultimately liable for any plan operational errors, even if they rely heavily on recordkeepers and third-party administrators (TPAs) for day-to-day plan administration.

In an article, Carol Buckmann, an employee benefits and ERISA [Employee Retirement Income Security Act] attorney and a co-founding partner of Cohen & Buckmann P.C., notes that whether it’s a failure to use the correct definition of compensation in determining benefits, calculate vesting service correctly or make required minimum distributions (RMDs) to eligible participants, plan sponsors might be surprised to learn that they are responsible for the issue—not their service provider.

“ERISA requires that every plan have a legal administrator and designates the plan sponsor as the default administrator when no other person has been appointed,” Buckmann explains. “This means that if the agreement doesn’t make the recordkeeper the fiduciary plan administrator, plan sponsors remain responsible for the recordkeeper’s mistakes found on audit or by a court, even if they just did what the recordkeeper told them to do or were unaware of the recordkeeper’s actions.”

Buckmann suggests that plan sponsors review their service agreements. Most often, the arrangements with recordkeepers contain disclaimers that the recordkeeper is not performing services as a fiduciary, which means it is not assuming the legal responsibilities of a plan administrator as defined in ERISA, she says.

A blog post from law firm Haynes and Boone says one way to mitigate a plan sponsor’s liability is through indemnification agreements with service providers, or contractual agreements in which one party agrees to pay for potential losses or damages not caused by the another party. However, the firm notes, the default language in service provider contracts often provides indemnification only for the service provider’s “gross negligence,” but not its “ordinary negligence,” leaving the employer responsible for correcting and paying for errors caused by the service provider that do not amount to gross negligence or intentional misconduct. In addition, many contracts with service providers contain a limitation of liability—often a multiple of the amount paid to the service provider under the contract.

Haynes and Boone suggests plan sponsors understand the extent to which they are still liable for the negligent acts or omissions of their plans’ service providers before entering into contracts with them.

Buckmann echoes these points in her article. She says, “While plan sponsors can try to negotiate more favorable indemnification provisions, they will always provide limited protection.”

However, Buckmann also suggests plan sponsors consider hiring a 3(16) plan administrator. She says 3(16) administrators vary in the tasks that they are willing to assume, so a best practice would be to issue a request for proposals (RFP) for an administrator and compare not only the cost of the services provided, but also their scope.

Buckmann notes that joining a pooled employer plan (PEP) is another option to mitigate plan sponsors’ liabilities.

None of these options offer complete protection from liability for plan sponsors, Buckmann says, “but outsourcing administration can materially restrict a plan sponsor’s liability exposure.”