When you look back on your career path and current job responsibilities, you may ask yourself how you became responsible for your company’s retirement plan. Rest assured, you are not alone. Employees can be tasked with fiduciary oversight - specifically investment management responsibilities - based on job title, longevity at their company, or ownership status.
However, assigning these tremendous responsibilities to individuals who may have little to no investment management background or experience can expose the plan to significant risks. Engaging an independent investment advisor that specializes in retirement plans can help mitigate these risks.
Investment advisors can act in various fiduciary capacities. The Employee Retirement Income Security Act of 1974 (ERISA) defines the responsibility of an outside fiduciary that acts in either a 3(21) or 3(38) capacity. The type of fiduciary you engage will depend on the level of involvement the trustees want in the investment decision process, the size of the plan, the expertise of those involved, and overall plan complexity.
An advisor that acts as a 3(21) fiduciary advises plan management and makes recommendations for changes to investments, while the plan sponsor maintains the responsibility for operating the plan in compliance with rules and regulations and making any investment-related decisions. Fiduciaries acting in a 3(21) capacity will perform due diligence on investment options and present a summary of that information to the trustees or committee to review in order for a decision to be reached. The 3(21) arrangement is attractive to plans that wish to remain more involved in the decision-making process and typically have larger decision-making committees.
An advisor that acts as a 3(38) fiduciary has full responsibility for making any investment-related decisions without counsel or input from the plan sponsor or the retirement committee. The fiduciary has the ability to react to market changes more rapidly since they have authorization to make decisions on behalf of plan trustees. The 3(38) arrangement is attractive to smaller plans and smaller organizations that are looking to leverage the expertise of the advisor while attempting to mitigate risks involved with managing the plan.
If you currently engage an independent investment advisor, when was the last time you reviewed their service contract? Do you understand the level of services or responsibilities they provide to the plan? For how many plans do they act in a fiduciary capacity and are you aware of the fees they charge for their services? Retirement plan advisors are trending away from charging asset-based fees and moving toward a more fixed fee structure with the ability to add on additional services on an à la carte basis.
It is important to remember that even if you engage an advisor in a fiduciary capacity, the plan sponsor still has the responsibility of fiduciary oversight. Plan sponsors can delegate but cannot abdicate this responsibility. Understanding the fiduciary capacity of your advisor and the level of services provided to the plan is necessary for plan trustees.
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