The 3 flavors of fiduciaries for retirement plans

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After the rise and fall of the Department of Labor’s “fiduciary rule,” followed by the Securities and Exchange Commission’s recent release of the Regulation Best Interest rule, many retirement plan sponsors are now familiar with the term “fiduciary.”  A fiduciary duty is the highest standard of care under the law.  Fiduciaries to an ERISA-qualified plan are legally obligated to put the participants’ interests ahead of their own when making decisions about the Plan. What can be confusing to plan sponsors is that plans can have more than one fiduciary, each with different responsibilities to the Plan.

There are three flavors of fiduciaries serving qualified plans.  And, like components of an ice cream sundae, each plan fiduciary can add a dimension to make the end result more divine.

First, the Plain Vanilla base:

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 ultimate responsibility to select and monitor service providers, negotiate fees, maintain the plan document, issue the participant notices, file the tax returns, and more. 

Next, you can add your choice of Strawberry or Chocolate:

Plan sponsors have an obligation to engage experts if they are not experts themselves.  Many sponsors therefore choose to hire an investment advisor to the plan.  There are two different types of investment advisor fiduciaries to plans. 

Which flavor of advisor do you choose?

  • Strawberry: A 3(21) Investment Consultant is known as a non-discretionary investment advisor.  This advisor makes investment recommendations to the trustee or plan oversight committee for a fee, and 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
  • Chocolate: A 3(38) Investment Manager is a discretionary investment advisor.  This advisor makes investment decisions with respect to the Plan assets without prior authorization from the trustee or plan oversight committee.  The 3(38) investment manager is liable for investment decisions; however, the plan sponsor retains responsibility for selecting and monitoring the service provider.

All plan sponsors should be clear about which flavor of investment advisor, chocolate or strawberry, its plan employs.  Some plans choose to scoop both flavors: a 3(21) investment consultant to make manager recommendations and a 3(38) investment manager to manage a separate account of one of the specific strategies utilized in the plan. 

How about a tasty topping?

Now that we have our three flavors of fiduciaries, what is missing from this flavorful treat?  All good sundaes need a delicious sauce (hot fudge, anyone?), which, in our sundae, is the cover of Fiduciary Liability Insurance.  It is important to distinguish between an ERISA fidelity bond and fiduciary liability insurance.  ERISA requires that all plan sponsors 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.  Just as all good sundaes need a decadent topping, 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.

The cherry on top

No sundae is complete without a cherry on top, and ERISA Section 404(c) is just that! 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.

With a delectable sundae ready to go, you can grab a spoon and enjoy!  If you want help choosing your fiduciary flavors, we are here to guide you.  Simply complete this request.

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