As plan sponsors become more aware of their fiduciary responsibilities, advisers and investment managers who offer to help them manage some of that responsibility have become more popular.
Under the Employee Retirement Income Security Act, plan sponsors have a duty to act prudently. They must monitor investments in their employer-sponsored retirement plans on a regular basis, says Jason Schwarz, president of Wilshire Funds Management in Santa Monica, Calif.
“One way plan sponsors can seek to mitigate that responsibility is to hire an adviser to help them monitor. That is what we do. It is driven by a desire by the plan sponsor to ensure they are doing what they need to do,” he says.
Under ERISA, a 3(21) fiduciary is a paid professional who provides investment recommendations to the plan sponsor. A 3(38) investment manager, meanwhile, is a special type of fiduciary that has more control over the plan, with the authority to make investment decisions on behalf of the plan.
Wilshire offers both 3(21) and 3(38) fiduciary services to plan sponsor clients. Wilshire’s 3(21) services help plan sponsors select and monitor their retirement plan’s investment options and, in that sense, the firm serves as a co-fiduciary.
Many of the company’s clients are small businesses and the 3(21) service helps them with a task that they are uncomfortable doing on their own. It doesn’t relieve them of their fiduciary responsibilities, however. The plan sponsor is ultimately still responsible for choosing the right company to work with and monitoring them to make sure they are also doing what is in the best interest of plan participants.
A 3(38) service is a little more extensive. Investment companies like Wilshire provide the plan sponsor with recommendations, guidance and have the authority to make changes to the fund line-up.
For many plan sponsors, being able to bring in someone more knowledgeable about investing and retirement plans is a good idea. Small plan sponsors, especially, don’t have the research and monitoring capabilities that financial advisers have and yet that is a component they must comply with under ERISA.
“Most plan sponsors don’t have the knowledge or the resources to devote to understanding investment options and then performing ongoing due diligence on those investment options,” says Michael Annin, senior managing director, investment strategies for Mesirow Financial. “That’s where we really step in. In some cases, advisers want and can take on that role. In most cases, especially down market, there is less want for them to take on that role because of the scale of it.”
With the Department of Labor coming out with a new fiduciary rule, many employers may be more familiar with the fiduciary discussion than they had been in the past.
“It is too soon to see how [the fiduciary rules] are going to shake out,” Schwarz says. “There are organizations and broker-dealers who may not want their advisers to serve as fiduciaries to plans, even if they can. In that case, we are seeing more demand for Wilshire’s fiduciary services. It is driven by organizations that really don’t want their advisers serving as a fiduciary to retirement plans.”
Also see: “Final fiduciary rule rests in DOL’s hands.”
That said, these changes are fueling a desire for such services among plan sponsors. Wilshire advises on more than $30 billion in assets in these types of investment programs.
“When we get clear definitions from the new regulations, more due diligence will be spent reviewing third-party fiduciaries,” Annin says.
Questions to ask
Plan sponsors need to ask themselves the following questions: Do you know who your third-party fiduciary is? What is their process and do you understand their process? How do they fit in with the overall goals of what the plan is attempting to accomplish? What is the level of fiduciary protection you receive from them? What do you get in terms of communication?
“We see more entrants coming into the space and are those entrants going to be conflict-free or are they more technology platforms and not focused on third-party fiduciary solutions?” Annin asks.
Schwarz makes it clear that hiring someone to provide 3(21) or 3(38) services for their plan doesn’t offload all of an employer’s fiduciary liability.
“They are not removing all liability associated with that, and ERISA is very clear when it comes to that,” he says.
Wilshire works closely with Fidelity to provide these types of investment advice services to its employer-clients.
Also see: “Top 30 401(k) plans.”
“It is a growing and increasingly important part of our business,” says Schwarz. “From our perspective, it is accelerating. This business for us didn’t exist four years ago. It went from $0 to $30 billion in assets in four years.”
So far, more companies are hiring outside advisers to provide 3(21) services than 3(38), but that could change in the future, he says. Some of that has to deal with the expense.
“There’s no question that when you are serving in a discretionary capacity, fees are higher than a non-discretionary role,” Schwarz says.
Mesirow Financial offers these types of services to 20,000 plan sponsors covering $40 billion in assets. It offers its advice services through specific recordkeepers.
Most the company’s assets that it is a fiduciary for fall under the 3(21) service, mostly because recordkeepers have not promoted 3(38) advice.
The company has definitely seen more interest in 3(38) fiduciary services. Annin believes that the 3(38) services will eventually surpass 3(21) services as people become more familiar with it.
Paula Aven Gladych is a freelance writer based in Denver.
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