Are you an ERISA plan fiduciary?

Not all fiduciaries are created equal. Some subtle nuances can have a detrimental – or positive – impact on your 401k plan.

All plan sponsors of qualified retirement plans (QRPs) have specific legal duties they must adhere to under ERISA.  A few of these duties involve selecting, monitoring, and replacing (if necessary) all investment options within a plan.

The main reason behind this chore is to eliminate from a plan any investments with “unreasonable” costs. Plan sponsors are required to disclose fees and such pertinent information to sponsors and participants, but this does not mean a change in strategy always takes place.

High investment fees can lead to lower investment returns to plan participants. For this reason alone, it may be beneficial to hire an investment manager to take over this fiduciary role.  You may be surprised to learn however, that hiring just any old fiduciary may no longer be up to par.

There are two types of retirement plan fiduciaries

ERISA fiduciary responsibilities explained
If you’re a fiduciary under ERISA, you’d better understand your duties.

There are two different definitions of fiduciaries under ERISA. The first is a fiduciary described under section 3(38).

A 3(38) fiduciary is one delegated by the sponsor that takes over the responsibility (and therefore liability) of selecting, monitoring, and replacing investments under a QRP.

a 3(38) fiduciary will have full discretion and they’re held legally responsible for the decisions and responsibilities bestowed upon them. They can only come in the form of a bank, insurance company, or registered investment advisor.

Stand-alone broker dealers can NOT be a section 3(38) fiduciary. This leads to the section 3(21) fiduciary.

A section 3(21) fiduciary takes no legal liability or responsibility off the plate of the sponsor. If your 401k advisor is a fiduciary at all, there’s a 90% chance they’re a 3(21) with no legal exposure.

A 3(21) fiduciary acts as a guidance counselor in effect. They only make recommendations, assist, help, and advise the sponsor in regards to the fund selection and monitoring process. They have no legally defined discretion over the plan investments. Therefore, they’re not liable in the case of any legal action taken against the plan sponsor.