There are two types of fiduciaries a Plan Sponsor can hire for their retirement plan assets. The first is an ERISA 3(21) fiduciary who does not necessarily exercise any authority or control over the management of the plan or the management of its assets. A 3(21) provides advice, but does not take control of the plan assets so the Plan Sponsor or committee still has the final say in how assets are handled. The new fiduciary regulations do hold the 3(21) responsible for those recommendations whether they are accepted or not.
The second is an ERISA 3(38) fiduciary. A 3(38) fiduciary is an Investment Manager that has discretion, authority, and control of the plan’s assets. Under ERISA, a Plan Sponsor can delegate the Investment Manager role which includes selecting, monitoring, and making changes to the investments offered in the plan.
As a Plan Sponsor who has hired a 3(38) Investment Manager, all responsibility has not been completely removed. There is still the fiduciary duty to monitor and evaluate the overall process the 3(38) is following and to make sure it remains in line with the objectives of the plan and it’s participants.
At TAG Resources we take all this a step further. In ERISA Sections 402(c) and 403(a) the term “named fiduciary” refers to a person who has the ultimate control or management power over plan assets. The Named Fiduciary has the authority to appoint and give instructions to the plan trustee. The Named Fiduciary is specified in the plan document. In most cases, the Named Fiduciary will be the employer or an officer of that employer. TAG serves as the Named Fiduciary for all our plans taking as much fiduciary liability off of our employers as allowed by law.
When a plan document allows, ERISA authorizes the plan’s Named Fiduciary to appoint an Investment Manager that will have the responsibility over the plan’s investment decisions (ERISA Section 402(c)(3)). If this Investment Manager is properly appointed and monitored by the Named Fiduciary, the Plan Trustee, the party normally responsible for the plan assets, will not be liable for the decisions made by the Investment Manager (ERISA Section 405(d)(1)). Keep in mind that this does not remove the responsibility to monitor the Investment Manager’s performance including reasonableness of fees.
There are several factors a Plan Sponsor or Named Fiduciary need to consider when appointing a 3(38) Investment Manager, here are a few:
- How much experience does the manager have and do they keep up with the constantly changing industry regulations?
- What are the manager’s processes and how is this documented? This is more important than just picking the best performing investments. It is more important to be able to support the appropriateness of any decision that is made even if it did not result in the best performing investment in its class.
- Service Agreement- what kind of reporting will the Investment Manager provide to the employer and how frequently?
- Do they have financial backing and E&O Insurance that includes 3(38) functions? Many E&O policies require a specific rider for this. It is important that a 3(38) have adequate financial backing in the event of a lawsuit.
- Third Party- it’s best to find a 3(38) Investment Manager with no ties to any investment company or recordkeeper so all decisions are unbiased.
As a Named Fiduciary, TAG has taken all this into consideration and have hired to the best of our ability and using the prudent man rule, the premier 3(38) Fiduciary Investment Managers in the industry. Our Plan Sponsors can rest assured we have taken as much of this responsibility away from them as allowed by law.
If you don’t know your potential liability exposure, it would be wise to do a thorough review of your plan documents or have them reviewed by a third party. No one likes surprises, especially if you were sold something that is different than the reality of what is included in your plan document.