Understanding a Retirement Plan Sponsor’s Fiduciary Responsibility

A plan sponsor’s personal liability

A recent seminar focusing on fiduciary responsibilities as they pertain to company retirement plans was so well-received we thought it would be a good idea to share this information with our clients and friends. As plan sponsors are aware, performing certain duties within the company retirement plan renders the plan sponsor personally liable. Understanding that often leaves plan sponsors wondering what steps should be taken to properly manage that liability.

What constitutes liability?

Liability comes in all shapes and sizes. This article does not claim to be an inclusive look at all potential liability, but instead focuses on the investment selection and monitoring ‘piece of the pie.’ If the plan sponsor is not an expert they must hire one to properly select and monitor the investments in the plan. Seems simple enough, right? Well not exactly. Not all advisors are created equal, and in some instances the plan sponsor can share, or even eliminate this liability.  For this article we are going to discuss two specific types of advisors that fall into the classifications as outlined by provisions in the Internal Revenue Code (IRC).

Option No. 1: Sharing the liability

Taking a page from a value instilled by our parents, the first advisor has a solution: let’s share. A 3(21) Advisor shares the fiduciary liability with the plan sponsor. Basically that solution says that if push comes to shove, you’re in it together. This is a great option for plan sponsors that want added protection, but still want to have the final say in the investment selection and monitoring process. Certain conditions must be met, but overall, this is a flexible option.

Option No.2:Handing over control

The second type of advisor wants nothing to do with the type of sharing described in a 3(21) plan. This advisor, a 3(38) Advisor, completely eliminates the plan sponsor liability as it pertains to investment selection and motoring. The 3(38) advisor must provide an in-depth monitoring and selection process. The process must be free of conflicts of interest. This is a requirement so stringent, that not everyone servicing the retirement plan world is eligible to offer 3(38) Advisor.

One group of advisors who are not able to offer 3(38) Advisor services are broker/dealers. The reasoning is simple: since broker/dealers can have proprietary funds as well as revenue sharing arrangements with the investments they recommend, their opinions may not be unbiased, and therefore they would not qualify for the IRC provision. If the plan advisor’s compensation is in any way determined by the individual funds being recommended, a conflict of interest may apply, and therefore 3(38) Advisor cannot be offered. One potential downside of a 3(38) Advisor is that when the advisor takes on this added liability, he or she must have complete control over the funds in the plan. If the plan sponsor enjoys having the final say in determining whether or not a fund makes the line-up, this might not be the right fit.

Making a decision that best fits your plan

There’s no one-size-fits-all advisor, but if you are a plan sponsor, it is important to know your options in order to make the appropriate selection. The 3(21) Advisor allows the sponsor to maintain some control over the plan’s investments while offering some protection. However, if you are hiring an expert to act as your investment advisor, it should be someone you trust. In that case it might be better to opt for the 3(38) Advisor.  If you have questions regarding the differences between 3(21) and 3(38) Advisors, please contact your Moneta Group Family CFO. 

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