Understanding Your Fiduciary Responsibility
As your company’s retirement plan sponsor, you’re legally and morally responsible for acting in the best interests of the plan and its participants. It’s your fiduciary duty, and it comes with a lot of responsibilities and decisions to make, not the least of which is determining your plan’s investment policies and choosing and managing the funds available in your plan.
Knowing all the ins and outs of your fiduciary obligation can be confusing and overwhelming, but it doesn’t have to be. This article will highlight what you need to know about your specific duties around investment selection, and how working with an experienced fiduciary services provider can help you reduce your risk and fulfill your fiduciary responsibility with ease.
The Basics
Employee retirement plans like 401(k)s are governed by The Employee Retirement Income Security Act (ERISA). Established in 1974, this federal law protects the interests of plan participants and their beneficiaries.
More specifically, ERISA outlines the specific duties of a fiduciary, and provides strict rules to ensure that workers’ and retirees’ plan assets are prudently managed. Certain people who help maintain a 401(k) plan, called fiduciaries, have to follow these rules, which make sure that the plan is being managed in participants’ best interests and that the assets are being handled properly.
Who Is A Fiduciary?
This is a simple question and, at least for plan sponsors, there is a straightforward answer: Since you’re responsible for overseeing your plan’s administration and operation, you are a fiduciary.
Essentially, fiduciary responsibilities are governed by the functions performed in connection with the plan. A plan sponsor is always a fiduciary. Additionally, anyone who has authority or control over the plan’s investment decisions, such as a retirement plan advisor or the members of a retirement plan committee, is considered a fiduciary. Fiduciaries can also include individuals who administer the plan or manage its assets. In general, fiduciaries are only responsible for the tasks they are assigned.
What Is My Fiduciary Responsibility?
As plan sponsor, you are fiduciarily responsible for making sure all fiduciary tasks get done and for determining what fiduciary duties will be assigned to other parties with whom you have a fiduciary relationship. Broadly, your duties include two types of fiduciary activities:
• Plan administration, which includes interpreting the plan’s terms and making sure it’s operating within those terms; selecting service providers to help administer the plan (as applicable); and providing information to plan participants and the government, such as fee disclosures, for example.
• Plan investment management, including determining the plan’s investment policies and selecting and monitoring the individual investment funds in the plan.
What If I Don’t Meet My Fiduciary Responsibility?
No matter what your title is, if you are considered a plan fiduciary, you may be personally liable under ERISA for failing to act prudently or otherwise breaching your fiduciary duty to the plan’s participants. The penalties may include:
• Being required to restore plan losses, with interest
• Returning any “ill-gotten” gains
• Paying any expenses related to correcting inappropriate actions
As a fiduciary, you may also be responsible for the actions of others with fiduciary responsibilities (i.e., co-fiduciaries), unless you have clearly limited the scope of your responsibilities in writing, or if you do not take corrective action after becoming aware of a breach or assist in the cover-up of one. And you may be responsible for your actions or those with whom you had fiduciary relationships while you were a plan fiduciary, even when you’re no longer in that role. That’s why it’s so important to actively monitor the plan and every decision made in it, every step of the way.
Under ERISA, every plan fiduciary and individual who handles plan assets must be covered under something called a fidelity bond. The bond protects the plan against losses resulting from fraudulent activities by any of the covered fiduciaries. Many fiduciaries may also carry liability insurance, although it’s not required by ERISA. This type of insurance protects fiduciaries should they incur liability expenses related to a breach of their plan-related responsibilities.
What Can I Do To Protect Myself?
To satisfy ERISA and related regulatory requirements, you are fiduciarily responsible for creating and maintaining a documented, prudent process to select, monitor and update investments that is appropriate for the plan and make sure the associated fees paid are reasonable.
It can be challenging for busy company owners and managers to fulfill these fiduciary duties. It takes time and commitment to diligently follow a documented process. What’s more, plan sponsors need to have an advanced level of knowledge when making plan investment decisions, and the fact is, many do not. However, ERISA requires fiduciaries who lack the requisite expertise to hire professionals to assist them. That’s why many plan sponsors rely on skilled, expert professionals to help them evaluable plan administration and investment decisions.
Fiduciary Service Providers: Understanding Your Options
Working with a knowledgeable investment professional who can assist you in meeting your fiduciary obligation can help mitigate some of the risks we’ve discussed so far.
Once you have made the decision to work with a retirement plan advisor, you’ll need to decide the type of fiduciary relationship you’re looking for. In other words, what level of service is right for you and the plan? Investment professionals come in a variety of forms. Some key questions you’ll want to ask about a potential fiduciary relationship include:
• Do you want to work with someone who makes investment recommendations, or investment decisions?
• Will the provider serve the plan in a fiduciary role?
• How involved do you want to be in plan-related investment decisions?
Depending on your answers to these questions, you may opt to delegate some or all investment-related activities to a(n):
• Broker/Agent, who will not typically serve the plan as a fiduciary under ERISA;
• ERISA 3(21) Investment Advisor, who will work with you as a co-fiduciary; or
• ERISA 3(38) Investment Manager, who will serve as the primary fiduciary responsible for making investment-related decisions for the plan
How Are They Different?
So now that you know the different types of investment professionals you can potentially have a fiduciary relationship with, let’s take a look at how, specifically, they can serve your retirement plan and assist you in fulfilling your fiduciary duty:
A Broker/Agent Can Educate You
A broker or agent may provide you with generalized education related to investments available through the plan, but typically will not provide customized recommendations or advice based upon the needs of your plan and its participants. Therefore, they do not generally assume any fiduciary responsibility for the plan.
On the other hand, both a 3(21) Investment Advisor or 3(38) Investment Manager are required to acknowledge their fiduciary status in writing and will, therefore, share or assume the responsibilities for selecting, monitoring and updating the plan’s investments as necessary.
The key difference between a 3(21) Investment Advisor and a 3(38) Investment Manager is that ERISA allows you to delegate all fiduciary obligation and liability to a 3(38) Investment Manager so long as you engage in a prudent process to select and monitor the 3(38) Investment Manager.
A 3(21) Investment Advisor Does It WITH You
If you prefer to maintain discretion and control of your plan’s investments, you may choose to hire a 3(21) Investment Advisor. By law, they must use an unbiased process to select investment funds to make available to your employees.
Under this arrangement:
• You are still fiduciarily responsible for approving the fund lineup, monitoring the funds on an ongoing basis and updating the investments when necessary.
• A 3(21) Investment Advisor delivers value by providing a documented, unbiased investment selection process and being knowledgeable about the funds they suggest, but their role is typically limited to making recommendations.
• You would continue to have primary fiduciary responsibility over the plan’s investments.
A 3(38) Investment Manager Does It FOR You
If your goal is to minimize your investment-related fiduciary liability to the fullest extent possible, you may be interested in hiring a 3(38) Investment Manager. In this case, you would delegate full fiduciary obligation to the manager to make decisions about the investment lineup.
Under this arrangement:
• The 3(38) Investment Manager will have discretion, authority and control over the selection, monitoring and updating of the plan’s investments.
• Your fiduciary duty is limited to selecting and monitoring the 3(38) Investment Manager and benchmarking the reasonableness of its fees.
The Choice Is Yours
In short, managing risk and your personal liability comes down to whether or not you choose to retain fiduciary responsibility over the investment decisions for the plan. Either way, you still have the fiduciary obligation to select and monitor the 3(21) Investment Advisor or 3(38) Investment Manager, regardless of their fiduciary status. Finally, it’s wise to consider the skill and experience of a potential 3(21) Investment Advisor or 3(38) Investment Manager as you contemplate the right balance for you between exercising control and your desire to limit potential liability.
Fiduciary Options: A Quick Comparison
| Broker/ Agent | 3(21) Investment Advisor | 3(38) Investment Manager | Payroll Provider | Insurance Company | |
| May educate regarding plan investments | Yes | Yes | Yes | ||
| Recommends plan investments | Yes | Yes | |||
| Selects plan investments | Yes | ||||
| Monitors plan investments | Yes | ||||
| Updates plan investments | Yes | Yes | |||
| Offers advice on plan investments | Yes | ||||
| Has discretion, authority and control over plan investments | |||||
| Assumes fiduciary responsibility | Yes |
GuidedChoice: We Can Help You Manage Your Fiduciary Responsibility
All of these roles and responsibilities may seem daunting, but we’re here to help. At GuidedChoice, we know that plan sponsors who educate themselves, hire experts, and diligently follow processes and procedures to ensure they meet ERISA requirements are in the best position to fulfill their fiduciary responsibilities.
When you partner with GuidedChoice to manage your fiduciary obligation, you benefit from a fiduciary expert who can act as a 3(38) as well as a 3(21) fiduciary for defined contribution (DC) plans. In other words, you get the best of both worlds whether you want partial or full fiduciary liability protection. We also offer indemnification for plan sponsors, advisors and our business partners for losses incurred as a result of a breach in our fiduciary duty. Our CEO, Sherrie Grabot, gives advice on what plan sponsors can do to adhere to their fiduciary responsibility. While this video was created in 2013 and our look has changed, the information is still relevant in helping you get started.
In addition, you have the option to use our Managed Account Service or Personalized Target Date Fund solutions as a QDIA and as a way to fulfill 404(c) requirements. GuidedChoice enables you to offer the retirement planning advice your participants expect and count on. What’s more, they provide you added flexibility, because we can customize our offering to incorporate your plan’s existing investment menu and strategy.
And, if you partner with a retirement plan advisor, they have the option to maintain 3(38) fiduciary responsibility at the plan level, while leveraging the investments inside of our Managed Account or Personalized TDFs to build optimized and personalized portfolios for individual participants. When you implement one of our services inside your plan, GuidedChoice helps take some of the fiduciary obligation off your plate, protecting you from undue risk while allowing your plan’s advisor to continue to deliver highly valuable advice and oversight of the plan. This partnership between your plan advisor and GuidedChoice is a win-win because you benefit from a powerful combination of fiduciary protection, expert plan oversight and personalized advice for every participant, helping to ensure the success of your plan and improve retirement outcomes.
Our Commitment To You
We’re here to provide the expertise and support you need to confidently and successfully fulfill your fiduciary responsibility. When you partner with GuidedChoice you’ll get our uncompromising commitment to excellent service, along with the knowledge that our fiduciary experts are available to help you every step of the way.
Click here to learn more about how our 3(21) and 3(38) fiduciary services can make it easier to manage your fiduciary duty, and here for more information about our managed account and personalized target date fund solutions for DC plans.
You can also contact GuidedChoice at 1-800-774-7459 or email us at info@guidedchoice.com.