ERISA 3(21) vs. 3(38) Fiduciary
Recently there have been articles written regarding the potential benefits of hiring an investment advisor who agrees to act in the capacity of an ERISA section 3(38) investment manager (or “3(38) fiduciary”) as opposed to an ERISA section 3(21) fiduciary for a qualified retirement plan. The information presented in these articles may be confusing and even sometimes misleading.
One definition of an ERISA section 3(21) fiduciary is an advisor who renders investment advice for a fee with respect to any monies, investments, or other property of a plan, or has responsibility to do so. Such an advisor serves in a co-fiduciary capacity to the plan and thus shares fiduciary responsibility and liability with other plan fiduciaries (i.e., investment committee members, board members). Hiring an ERISA section 3(21) fiduciary may help to mitigate the potential liability of the other plan co-fiduciaries, as the advisor would provide the necessary investment expertise and process to assist in the required investment decision-making process.
ERISA section 3(38) defines the term “investment manager” as a fiduciary who also is responsible for providing investment advisory services, but with the important distinction of possessing discretionary control over the investment decisions for the plan. In hiring a 3(38) fiduciary advisor plan fiduciaries (again, investment committees, board members, etc.) remove themselves from the ongoing investment decision-making process. However they cannot eliminate all of their fiduciary responsibility, as some articles would suggest. Procedural prudence remains necessary for all fiduciary decision making. This includes the process for hiring not only an ERISA section 3(21) fiduciary advisor, but potentially even more so for the process for hiring an ERISA 3(38) advisor (because the fiduciaries are turning over control of all investment decisions to the ERISA 3(38) advisor).
In brief, plan fiduciaries seeking to reduce their liability for investment decisions by hiring an ERISA 3(38) fiduciary advisor must understand that it requires giving up the control over plan investments and that some, but not all, fiduciary liability can be shifted. Advisors can serve as either (or even both) a 3(21) or 3(38) fiduciary advisor.
An article by the Plan Sponsor Counsel of America came as a bit of a surprise to many plan employers. It read, “During several recent audits, plan sponsors were surprised to hear the DOL auditor ask for documentation that the members of the Fiduciary Committee received fiduciary training over the past year.” (The article is entitled, DOL Auditors Seek Proof of Fiduciary Training.)
The article discusses challenges that employers face in accessing the appropriate fiduciary training. In the article, the DOL responds to this issue as follows: “Staff believes that there may be worthwhile and suitable fiduciary training programs available. Where the department has required training as part of its settlements, the fiduciaries are able to identify such programs.”
Further, when asked if there is now a predisposition to add a formal (fiduciary) training program, the DOL responded, “We support anything that helps plan fiduciaries more effectively manage their plan in the best interest of the participants.”
When you think about it, how can a fiduciary act in concert with ERISA guidelines for behavior if they are not sufficiently trained in what that behavior should be. Remember, fiduciaries are held to the highest standard of due diligence under ERISA’s “prudent expert” rule. Employers have varying levels of understanding of their roles and responsibilities as fiduciaries. We have made certain that our plan employer clients are well informed about their fiduciary status. Out of this concern, and the realization that this topic would continue to become increasingly important for our clients, we developed the Fiduciary Fitness Program. Today this program provides fiduciary education, and also serves as a self-audit of fiduciary behavior and documents all major aspects of fiduciary activity.
If you have questions about your fiduciary responsibilities, or would like more information about the Fiduciary Fitness Program, please contact your Plan Consultant today.