Administering a retirement plan and managing its assets involve specific responsibilities that can be difficult for most employers to perform. They first need to understand the rules and regulations of the Employee Retirement Income Security Act (ERISA). This is complicated enough, and oftentimes it will require a fiduciary service provider to help the employer understand everything involved. ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (i.e., fiduciaries). A plan must have at least one named plan fiduciary. For some plans, the plan fiduciary may be an administrative committee or a company’s board of directors. The key to determining whether an individual or an entity is a fiduciary is whether it is exercising discretion or control over the plan.
The responsibilities of a fiduciary include the following:
Acting solely in the interest of plan participants and their beneficiaries
Carrying out duties prudently
Diversifying plan investments
Following the plan documents
Prudent Investment Oversight
Under ERISA, plan fiduciaries must meet a standard of care that requires the selection and monitoring of plan investments to be done prudently. Procedurally, the fiduciary must perform an independent investigation of the merits of each investment, which encompasses gathering and considering all relevant information. While the duty to monitor may sound like a passive responsibility, it requires plan fiduciaries to manage the investment menu proactively—conducting reviews on an ongoing basis. Plan fiduciaries also must remove or replace investment options on a timely basis as necessary.
In most instances, the plan fiduciary will not have the necessary experience or resources to conduct an independent investigation of the plan’s investments. Many need some degree of support to monitor and select investments. In fact, if a plan fiduciary does not have the investment knowledge or expertise to conduct any aspect of the procedural investigation, ERISA requires the plan fiduciary to seek the assistance of a qualified professional. That’s where you, the advisor, come in.
When considering a retirement plan’s investments, there are two primary frameworks for you to provide support in a fiduciary capacity:
3(21): Defined under ERISA section 3(21) as any advisor who provides investment advice to plan clients
3(38): Defined under ERISA section 3(38) as a plan’s investment manager
But before we dive into these two fiduciary levels of support, let’s first take a step back and consider support in a nonfiduciary capacity.
Fiduciary? I Am Not
You can provide investment services to retirement plans without holding yourself out as a fiduciary. There’s the option to offer nonfiduciary investment assistance to plan clients. Although your recommendations may constitute investment advice from a securities law perspective, your guidance is not intended to be viewed as “investment advice” within the meaning of ERISA.
Under ERISA, a person can be deemed as providing fiduciary investment advice if certain scenarios apply, including:
Such person renders advice to the plan as to the value or advisability of making an investment in securities or other property on a regular basis; and
Pursuant to an agreement (written or otherwise), that such service will serve as a primary basis for investment decisions.
Routinely providing assistance will almost always trigger the first part of the “investment advice” definition described above. To avoid triggering the second part of the definition, as a nonfiduciary advisor, you must discourage plan fiduciaries from relying on your investment recommendations too heavily or exclusively. For plan fiduciaries, though, this is not efficient, as it calls for the plan fiduciary to acquire additional professional support.
A 3(21) Fiduciary: Providing Investment Advice
In contrast to nonfiduciary advisors, if you serve as a 3(21) fiduciary, your recommendations can be exclusively relied upon as the basis for informing a plan fiduciary’s investment decision. You can provide nondiscretionary investment advice and recommendations as a co-fiduciary for the plan’s investment oversight. Assisting in the procedural investigation of the plan’s investment menu, as a 3(21) fiduciary service provider you would:
Score and evaluate investment funds
Produce plan reviews and investment reports
While as a 3(21) fiduciary you can provide tremendous assistance for a plan’s investment oversight, the plan fiduciary remains fully responsible for all investment decisions. There are many plan fiduciaries who would prefer investment decisions to be made for them, however. This is where 3(38) fiduciary services come in.
A 3(38) Fiduciary: Providing Investment Management
As a 3(38) fiduciary, the ongoing procedural responsibilities around a plan’s investment oversight shift over to you. You would be authorized to make and implement investment decisions on behalf of the plan. In this role, you would perform the following:
Monitor existing investments
Replace investments when you deem it necessary
The plan fiduciary satisfies his or her responsibility for installing a prudent investment oversight process and you accept responsibility to implement that investment oversight process. The burden of procedural investigation of each investment’s merits becomes your responsibility.
Through this framework, plan fiduciaries can benefit in several ways:
Reduce their fiduciary responsibility: A significant portion of fiduciary burden is removed from the plan fiduciary, and his or her ERISA requirement to establish a prudent process for the selection and ongoing monitoring of plan investments is fulfilled.
Put investment selections in the hands of experts: A 3(38) fiduciary service provider typically uses institutional-quality research and experienced staff to arrive at investment decisions.
More time to focus on running their business: Plan fiduciaries have more time to focus on running their business and keeping their employees engaged—all while offering a valuable retirement savings benefit.
What Role Will You Play?
For many employers, the responsibilities of managing the assets of a retirement plan can be overwhelming and complicated, and plan fiduciaries will likely look to a financial advisor for varying levels of guidance. At Commonwealth, we help our affiliated advisors extend an additional layer of fiduciary protection to their plan sponsor clients through our PlanAssist Investment Services platform. Through it, advisors have access to consulting agreements, handouts, IPS templates, and everything else they need to streamline the entire investment process. Regardless of the role you choose to play, servicing in a fiduciary capacity with retirement plan clients can both ease their burden and help you expand your business.
This material is for educational purposes only and is not intended to provide specific advice.