On October 22, 2010 the U.S. Department of Labor proposed to broadly amend the definition of fiduciary under ERISA as a person who provides investment advice to plans for a fee or other compensation. The rule has generated a lot of controversy, and the DOL has delayed the redraft of it until at least January 2015.
There is one matter, however, about which there is no controversy. That is, the plan sponsor has ultimate responsibility for the investment of plan assets. Fortunately, the marketplace offers different levels of support for those 401(k) plans that need help determining the appropriate investments for their participants and benefit advisers and brokers should understand the intricacies this provision.
There are four levels of fiduciary support available from retirement plan providers in todays marketplace. Each offers a different level of support with regard to investment selection and monitoring.
Here is a brief description of each in the order of lowest to highest fiduciary protection:
1. Due diligence support: Providers offering this service have an evaluation process with regard to the investment options they offer under their retirement programs usually known as due diligence support. The provider offers a wide array of funds, and plan sponsors use the tool to help construct an appropriate line-up for their plan. However, the plan sponsor is still responsible for selecting and monitoring the plans investment options.
2. Fiduciary certificate or warranty: Providers offering this service provide a certificate or warranty that is generally available to plan sponsors if they select at least one fund in designated asset classes. There is due diligence support for evaluating their funds combined with last-resort fiduciary liability protection if numerous conditions are met.
3. Acknowledgment as a fiduciary under Section 3(21)(A)(ii) of ERISA: Some 401(k) programs use the services of an independent registered investment adviser (RIA) who agrees to become an investment advice fiduciary under section 3(21)(A)(ii). Under this service, the RIA recommends and monitors funds for the plans fund menu. However, employers are still responsible for selecting and monitoring the specific funds used on the menu.
4. Acknowledgment as a fiduciary under Section 3(38) of ERISA: Some 401(k) programs use the services of an RIA who agrees to become an investment advice fiduciary under Section 3(38) and assume all responsibility for investment selection and monitoring. A Section 3(38) arrangement represents the most comprehensive level of fiduciary support possible under ERISA.
There is no best option. Each fiduciary must decide based on individual facts and circumstances. But remember, all fiduciary responsibilities cannot be delegated away. The plan sponsor always retains the responsibility to monitor the service provider on a periodic basis.
Important note:This article is provided for informational purposes only and is not intended to provide tax, legal or investment advice. Employers should review their specific situation with their advisers.
Kalish is an EBA Advisory Board member and president of National Benefit Services Inc., a Chicago-based third party administrator. He is a guest lecturer at the John Marshall School of Law LLM program in employee benefits and serves on the Great Lakes IRS Advisory Council for tax exempt and government entity plans. Kalish has been publishing The Retirement Plan Blog since 2006. He can be reached via email at firstname.lastname@example.org and followed on Twitter and LinkedIn.
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