Reading an article about fiduciary duties and responsibilities isnt frequently associated with fun. But, being a fiduciary carries a heavy weight and lots of responsibility. Breaches of such responsibilities can result in both civil and criminal action, though the latter is rare and usually the result of egregious behavior.
Fortunately, retirement plan sponsors have a growing menu of options to help them manage their fiduciary obligations and offset some of their legal liabilities.
One of the main hurdles that plan sponsors face is that they often dont have the investment expertise to make prudent decisions, properly benchmark fees and investment lineups, or have the time to document all the decisions they make. As such, they are increasingly retaining third-party investment advisers to assist them.
A plan sponsor seeking to delegate discretionary authority to a third-party adviser for selecting and monitoring the investment options within its plans would need to hire an investment manager as described in ERISA 3(38). An investment manager is given complete discretion over participant plan assets, which helps insulate the plan sponsor and other plan fiduciaries from decisions related to the investment options within the lineup. This is the highest level of investment liability transfer under ERISA. The investment manager also monitors those investment options and has the authority to replace the investments when such action is deemed necessary.
Another popular option is to hire an investment adviser to provide investment recommendations as described in ERISA 3(21)(A)(ii). Advisers are generally treated as an ERISA fiduciary if their recommendations serve as the primary basis for investment decisions relating to plan assets, overall lineup construction, inclusion of various investment strategies, or diversification of plan investments. In this case, the third-party adviser is a fiduciary to the investment advice provided to the plan and shares the liability if problems arise.
Making the right choice
So, how should plan sponsors go about deciding if they need to hire a 3(21)(A)(ii) or 3(38)? The best place to start is to determine how confident you are in your teams abilities to make investment decisions. If you have a high level of confidence, then you next must decide if you are willing to assume the liability of making those investment decisions.
In many cases, the decision will come down to how much liability your plan is exposed to. If you are overseeing an older plan that has undergone a lot of changes over the years and has a significant amount of assets, then getting some fiduciary protection might be advisable. If its a newer plan that has undergone minimal changes and has fewer assets, then it may make more sense to hold off on hiring a 3(21)(A)(ii) or 3(38).
So, if you have the investment expertise but want to offset some portion of the liability, then a 3(21)(A)(ii) might be a more effective option. With a 3(21), the fiduciary will help the plan sponsor design a blueprint for its plan basically making the asset class decisions and fund-level recommendations.
Under a 3(21)(A)(ii) arrangement, the plan may consider the recommendations of its independent adviser, but it has the final decision-making authority regarding the lineup. Within this structure, the independent adviser hired has fiduciary responsibility for its investment recommendations. However, the plan has the duty to monitor the funds theyve selected and replace those that are no longer serving the best interests of participants.
If your company doesnt have the inhouse expertise or isnt comfortable being the investment decision maker, then you have a fiduciary obligation to find someone who does. In most cases in which a plan doesnt feel like it has the internal expertise or doesnt have the time to perform its duties, then a 3(38) is the safer bet, albeit, a potentially higher cost.
With both options, the outside fiduciary is obligated to furnish you with a plan that is well-diversified, meets the specific needs of your employee base, and offers the most appropriate funds based on your plan demographics.
Selecting the right fiduciary partner
No matter which direction you decide to go, you still need to do your homework before hiring a 3(21)(A)(ii) or 3(38) fiduciary. Although you can mitigate some or nearly all of your fiduciary liability relating to investment decisions by appointing an outside investment fiduciary, you are still legally responsible for the hiring of that outside party and must monitor the independent fiduciarys decisions to ensure that it is following its stated process, as outlined in the Investment Policy Statement.
Additionally, you will need to examine the experience and qualifications of the firm handling the plan, that firms financial health (is it capable, for instance, of absorbing a legal judgment?), its performance record, and whether its subject to any conflicts of interest.
Lastly, you need to establish and follow a monitoring process at reasonable intervals after the hiring of an investment fiduciary. That process should include reviews of its performance, the data it provides, the fees being charged, and its compliance procedures.
Joe Frustaglio is vice president of private-sector retirement plans, Nationwide Financial. Cindy Galiano is director of investments, Morningstar Investment Management.
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