Head Investment Partners can serve as a 3(38) Investment Manager, removing the fiduciary investment liability from the committee and plan sponsor.
Plan sponsors are required by ERISA to provide an investment lineup for participants that has been prudently selected and monitored to minimize and control risk. To ease this burden, a Retirement Plan Advisor may act as an ERISA 3(21) investment fiduciary with regards to the selection, monitoring and replacement of plan investments or as an ERISA 3(38) Fiduciary with full discretion regarding the selection, monitoring and replacement of plan investments.
A Retirement Plan Advisor can serve in either a 3(21) or 3(38) Fiduciary capacity, and in some cases, both capacities. The needs and desires of the plan sponsor typically dictate the specific arrangement, which is predicated upon the subject of risk mitigation versus risk avoidance. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plans’ investment menus. Others want to shift responsibilities to a third party due to their lack of expertise, and ultimately, fear of exposure to liability.
State in writing fiduciary status
Follow IPS to build an approved fund menu
Provides a list of approved funds
Assists with monitoring of approved fund menu
Makes recommendations for changes to approved fund menu
Recommends mapping guidelines
State in writing fiduciary status
Drafts IPS & must follow the IPS to build the fund menu
Builds fund lineup
Monitors fund lineup
Makes changes to fund menu
Determines mapping strategies
Any individual is a fiduciary under Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or she renders investment advice for a fee (or has any authority or responsibility to do so); or if he or she has any discretionary responsibility in the administration of the retirement plan.
Section 3(38) defines “investment manager” as a fiduciary due to their responsibility to manage the plan’s assets. ERISA provides that a plan sponsor can delegate the responsibility (and thus, likely the liability) of selecting, monitoring and replacing investments to a 3(38) investment manager/fiduciary. A 3(38) fiduciary may only be a bank, an insurance company, or a registered investment advisor (RIA) subject to the Investment Advisers Act of 1940.
Anyone can call himself or herself a fiduciary, but a fiduciary is determined not only by title, but by actions as well. Both 3(21) and 3(38) advisors accept fiduciary responsibility and adhere to ERISA §404(a)’s duty to serve solely in the interest of plan participants. In addition, both have to meet the “prudent expert” standard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor’s fiduciary status. Plan sponsors should consider the advisor’s experience, skill and level of expertise, in addition to their desire to take on exposure to potential liability.
Working with a retirement plan advisor as your 3(21) or 3(38) fiduciary has great potential to limit your exposure to fiduciary liability, while reducing the time and expertise required to perform the plan’s ongoing investment monitoring and selection duties. Most of the responsibility for (and virtually all responsibility in the case of 3(38) engagement) investment-related decisions is shifted to the advisor, giving the plan sponsor greater peace of mind and time to focus on other aspects of its business.