As a Plan Sponsor, you have many questions to consider surrounding your 401(k) Plan.

The biggest issue is the fiduciary one – as recent lawsuits that target 401(k) plan sponsors as well as the DOL’s evolving fiduciary rules highlight. As the plan sponsor, what level of fiduciary protection is right for your organization?

The good news is that retirement plan providers are offering fiduciary services with more options and choices than in the past. The more difficult decision is which level of service is the best fit for your organization.

Regardless if a plan sponsor selects a fiduciary service or takes on this obligation on their own, section 404(c) of ERISA offers some protection when it comes to investment decisions. However, in order to qualify for these 404(c) protections, retirement plans must meet specific requirements, which include, but are not limited to the following:

  • A broad range of investment options must be offered
  • This is defined as at least three (3) diversified investment categories that have different risk/reward characteristics; and
  • When combined, offer a participant diversification for their overall portfolio
  • Participants must be provided access to information about the investment options
  • The plan sponsor must provide certain information and disclosures about the plan both automatically and upon request.

ERISA defines two (2) varying levels of fiduciary services when it comes to enhancing 404(c) protection. The first is section 3(21), in which a 3(21) fiduciary advisor acts as a co-fiduciary with the plan sponsor. The 3(21) fiduciary serves as the plan’s financial advisor and among other duties, makes fund (investment) recommendations. However, the ultimate discretion to implement the changes rests with the plan sponsor.

The second option is section 3(38), in which the 3(38) fiduciary advisor both selects (instead of recommending) the investment lineup, and has discretion to implement any changes to this lineup. Thus, the fiduciary responsibilities and liability of the investment lineup is shifted to the 3(38) fiduciary.

A key point to keep in mind is that regardless of any fiduciary service selected, the plan sponsor still retains the responsibility to select and monitor the advisor. The plan sponsor is never completely separated from fiduciary obligations.

Some plan sponsors have more experience and knowledge when it comes to managing their fiduciary investment responsibilities, and want to retain greater control of the investment selection process. Other plan sponsors desire to add a level of protection and give up some control with a 3(21) or 3(38) fiduciary service.

Both 3(21) and 3(38) advisors must adhere to ERISA section 404(a), and the duty to serve solely in the best interests of retirement plan participants, along with meeting the “prudent person” standard of care.

Here is a brief comparison of 3(21) v. 3(38) fiduciary services:

3(21) Fiduciary Service

Co-Fiduciary Status

Assists in drafting the Investment Policy Statement (IPS)

Helps in designing the initial investment lineup

Provides monitoring of the investment lineup

Recommends changes to the investment Lineup:

  • The plan sponsor maintains discretion to implement

Recommends mapping strategies for new investments

Provides documentation (meetings, disclosures, etc).

3(38) Fiduciary SErvice

Co-Fiduciary Status

Drafts the Investment Policy Statement (IPS)

Designs and builds the initial investment lineup

Monitors the investment lineup

Makes changes tot he investment lineup

Determines mapping strategies for new investments

Provides documentation (meetings, disclosures, etc)

When deciding whether to add a level of protection with a 3(21) or 3(38) fiduciary advisor, plan sponsors should consider the advisor’s experience, level of expertise and skills, and if these are a good fit for needs of the plan sponsor. This is where Fortune Financial can make a Difference.

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