Many fiduciaries are clear that a fiduciary duty is the highest standard of care under the law. Fiduciaries to an Employee Retirement Income Security Act (ERISA) qualified plan are legally obligated to put the participants’ interests ahead of their own when making decisions about the plan.

After the rise and fall of the Department of Labor’s “fiduciary rule,” followed by the Securities and Exchange Commission’s release of the Regulation Best Interest rule, many retirement plan sponsors are hearing the term “fiduciary” in the news more than ever.

However, despite the increased public attention to this topic, many plan sponsors are still unclear about the various roles and levels of fiduciary responsibility.

  • What is a fiduciary’s scope of fiduciary responsibilities?
  • How does that vary by fiduciary type?
  • How does that change when outside fiduciaries are hired to provide services to a plan?
  • How can fiduciaries reduce their fiduciary liability?

Fiduciaries serving ERISA qualified plans:

Plan Administrator

The 3(16) Plan Administrator is the fiduciary that has discretionary responsibility for the administration and oversight of the plan. Every plan has a 3(16) fiduciary; typically, it is the plan sponsor. This fiduciary may elect to outsource much of this work to a third-party administrator (TPA), but the 3(16) fiduciary has the ultimate responsibility to select and monitor service providers, negotiate fees, maintain the plan document, issue the participant notices, file the tax returns, and more.

3(21) vs. 3(38) Fiduciary Services

Plan sponsors have an obligation to engage experts if they are not experts themselves. Many sponsors, therefore, choose to hire an investment advisor for the plan.

There are two different types of investment advisor fiduciaries to plans:

  1. 3(21) Investment Advisor – This non-discretionary investment advisor makes investment recommendations to the trustee or plan oversight committee. The trustees or committee may choose to accept or reject the recommendation. In this arrangement, the trustees or committee are liable for the investment decisions; or
  2. 3(38) Investment Manager: This discretionary investment advisor makes investment decisions with respect to the plan assets without prior authorization from the trustee or plan oversight committee. However, the plan sponsor typically first establishes investment policy guidelines, such as the type of investment menu options that will be offered to plan participants, with guidance from the advisor. The 3(38) investment manager is liable for specific investment decisions; however, the plan sponsor retains responsibility for establishing investment policy and selecting and monitoring the service provider(s).

All plan sponsors should be clear about which type of investment advisor their plan employs.

Some plans choose to have both a 3(21) investment advisor to make manager recommendations and a 3(38) investment manager to manage a separate account of one of the specific investment strategies utilized in the plan.

ERISA Fiduciary Liability Protection

Fiduciary Liability Insurance

Plan sponsors must secure insurance coverage. While there is some flexibility in coverage options, it is important to distinguish between an ERISA fidelity bond and fiduciary liability insurance. ERISA requires that all plan sponsors and all investment advisors with discretionary authority obtain a fidelity bond to protect against fraud or dishonesty; this insurance is inexpensive because claims against this type of policy are rare. Fiduciary Liability Insurance is optional but far more valuable.

Fiduciary liability insurance protects fiduciaries against claims of breach of fiduciary responsibility, the basis of most participant lawsuits against plan sponsors. All plan sponsors should consider purchasing fiduciary liability insurance. Participants can file claims even when plan sponsors have done nothing wrong, and this insurance covers the cost of legal defense.

ERISA Section 404(c)

ERISA Section 404(c) is an optional protection that relieves plan sponsors from liability for losses resulting from participants’ direction of their investments in the plan. All participant-directed plans should take the necessary steps to satisfy the conditions of 404(c) in order to reduce fiduciary liability.

Plan sponsors should maintain a 404(c) checklist and review it periodically to ensure that they are satisfying the numerous requirements to achieve this critical protection.

At The Advisory Group of San Francisco, we help you understand and fulfill your fiduciary responsibility, simplify your job and improve outcomes for beneficiaries and stakeholders.   

We know that the one of the most valuable liability protections for plan sponsors is a prudent process.  That’s why we’ve developed a process that applies industry best practices and uncommon insight, so you can focus on your core mission or business.

If you are a client of The Advisory Group with new fiduciary committee members that would benefit from a presentation on fiduciary responsibility, or are a prospective client seeking such support, please contact us.

Editor’s Note: This article was originally published in September of 2019. It has been updated for clarity and depth.