Article written by: Scott D. Michael, CFP®, AIF®
Plan sponsors are required by ERISA to provide an investment lineup for participants that has been prudently selected and monitored to minimize and control risk. To ease this burden, a retirement plan advisor may act as an ERISA 3(21) or ERISA 3(38) investment fiduciary with regards to the selection, monitoring and replacement of plan investments. In some cases, an advisor may serve in both capacities.
The needs and desires of the plan sponsor typically dictate the specific arrangement, which is predicated upon the subject of risk mitigation versus risk avoidance. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plans’ investment menus. Others want to shift responsibilities to a third party due to their lack of expertise, and ultimately, fear of exposure to liability.
An individual is a fiduciary under Section 3(21) if they exercise any authority or control over the management of the plan or the management or disposition of its assets; if they render investment advice for a fee (or have authority or responsibility to do so); or if they have any discretionary responsibility in the administration of the plan.
Section 3(38) defines “investment manager” as a fiduciary due to their responsibility to manage the plan’s assets. ERISA provides that a plan sponsor can delegate the responsibility (and thus, likely the liability) of selecting, monitoring and replacing investments to a 3(38) investment manager/fiduciary. A 3(38) fiduciary may only be a bank, insurance company, or registered investment advisor (RIA) subject to the Investment Advisers Act.
|State in writing fiduciary status||State in writing fiduciary status|
|Follows IPS to build an approved fund menu*||Drafts IPS & must follow the IPS to build the fund menu|
|Provides a list of approved funds||Builds fund lineup**|
|Assists with monitoring of approved fund menu||Monitors fund lineup|
|Makes recommendations for changes to approved fund menu||Makes changes to fund lineup|
|Recommends mapping guidelines||Determines mapping strategies|
|Provides documentation||Provides documentation|
*Plan sponsors can choose from a menu of approved funds that the advisor maintains through the use of an IPS and monitoring system.
**The advisor will build, monitor and make the necessary changes to the fund lineup.
Anyone can call themselves a fiduciary, but a fiduciary is determined not only by title, but by actions as well. Both 3(21) and 3(38) advisors accept fiduciary responsibility and adhere to ERISA §404(a)’s duty to serve solely in the interest of plan participants. In addition, both have to meet the “prudent expert” standard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor’s fiduciary status. Plan sponsors should consider the advisor’s experience, skill and level of expertise, in addition to their desire to take on exposure to potential liability.
Our experienced team at Domani Wealth can help plan sponsors navigate these decisions. Please contact us to schedule a time to discuss.
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