Fiduciary Bingo — A Simple Guide For Employers

Over the last decade, adoption of defined contribution plans (think 401(k)s and 403(b)s) has increased significantly. Due mainly to pension plans falling out of favor, the onus on employees has never been greater to plan, and save, for their own retirement.

Employers (also known as plan sponsors) who decide to offer a retirement plan typically have the best of intentions in helping their employees, often matching employees (participants) contributions as an incentive to save.

What is often not understood is that by offering a retirement plan to their employees, the employer becomes a fiduciary responsible for managing the plan in the best interest of its employees. Generally, the expertise of the employer is not in understanding the complexities of how a retirement plan works and even more often, doesn’t realize the legal burden that they are agreeing to when offering a retirement plan of any kind.

The duties of a plan sponsor are outlined in the Employee Retirement Income Security Act (ERISA), a federal law enacted in 1974 and most recently augmented with the Setting Every Community Up for Retirement Enhancement (SECURE Act) and SECURE Act 2.0. Under ERISA, plan fiduciaries bear the burden of accountability if they neglect their duties. The legislation outlines mandates for reporting, disclosure, participant solicitation, enrollment, and investment plan preparation. These obligations are distributed among the plan fiduciaries.

3(16) Fiduciaries

The role of a 3(16) fiduciary primarily revolves around plan administration tasks, such as distributing summary plan descriptions, enrolling members, and fulfilling reporting obligations. Often, this role is outsourced to a third-party administrator hired by the plan sponsor. However, if no third-party administrator is appointed, the plan sponsor assumes the duties of the 3(16) fiduciary. Despite outsourcing to a third party, the plan sponsor retains some liability for the plan’s operation.

While having an external 3(16) fiduciary can enhance compliance with ERISA regulations, the sponsor remains responsible for selecting the third-party administrator and ensuring the fiduciary’s responsibilities are carried out effectively.

Overall, the 3(16) fiduciary plays an essential administrative role, ensuring adherence to ERISA requirements for reporting, disclosures, and paperwork filings.

3(21) Fiduciaries

The 3(21) fiduciary serves as a financial advisor to the plan, offering advice and recommendations on how to invest the plan’s assets in exchange for a fee. This fiduciary may vary in their level of involvement, from providing limited guidance to being extensively engaged. They play a crucial role in ensuring compliance with the investment-related aspects of ERISA requirements.

While the advisor’s primary focus is on selecting investments beneficial to participants, their fiduciary responsibility is typically limited. In this capacity, they might present investment options to the plan sponsor or 3(16) fiduciary, aligning with the plan’s objectives. However, regardless of the extent of their involvement, the ultimate responsibility for investment decisions rests with the plan administrator. Additionally, the 3(21) fiduciary can offer investment recommendations to other fiduciaries involved in the plan’s management.

3(38) Fiduciaries

A 3(38) fiduciary, typically an external financial professional, is hired to manage a retirement plan. Limited to banks, insurance companies, or registered investment advisors, these fiduciaries have the authority to independently make investment decisions. They bear full responsibility and liability for managing the plan in the participants’ best interests, akin to a 3(16) fiduciary. They are responsible for selecting, monitoring, and managing funds and investment portfolios for retirement plans.

Under ERISA, they must act prudently in the plan’s best interests, ensure appropriate investment options, follow the plan’s document, and avoid conflicts of interest. While transparency is expected, investment decisions rest solely with the 3(38) fiduciary, alleviating some liability for 3(16) fiduciaries. However, 3(16) fiduciaries retain the power to replace a 3(38) fiduciary if performance is unsatisfactory.

Benefits of a 3(38) Fiduciary:

Risk and Responsibility Management: A 3(38) fiduciary shoulders the majority of risks and responsibilities associated with investment offerings in an employer-sponsored retirement plan.
Portfolio Oversight: They are responsible for managing and selecting funds within the investment portfolio.
Delegated Investment Responsibility: Even if a third-party is appointed, as a plan sponsor, you are ultimately accountable for your plan. However, by selecting a 3(38) fiduciary, you can confidently delegate much of the investment responsibility. This fiduciary is committed to making prudent investment decisions on your behalf.
Reduced Investment Responsibility: Collaborating with a 3(38) fiduciary, such as Guideline, allows you to limit your investment responsibility, providing peace of mind that your employees’ retirement plan is managed by investment professionals.

Strategic Advisory Partner’s Guiding Principles as a 3(38) Fiduciary:

Fiduciary Duty: As a 3(38) investment management fiduciary, Strategic Advisory Partners (SAP) is bound by a legal obligation to act in the best interests of all plan participants.
Investment Strategy: SAP’s investment committee consistently evaluates investment strategies and performance. Their philosophy emphasizes minimizing fees, diversification, and adopting a long-term approach.
Expertise Utilization: Acknowledging that not all plan sponsors are investment experts, SAP encourages delegating investment responsibilities. This allows business owners and benefits managers to focus on essential tasks such as employee satisfaction and business growth.

What Does This All Mean?

The structure of fiduciary roles in 401(k) plans involves 3(16), 3(21), and 3(38) fiduciaries, each with distinct responsibilities ranging from administration oversight to investment management. These fiduciaries collectively ensure participants receive their entitled benefits, with the 3(16) fiduciary bearing the added duty of selecting and supervising other fiduciaries.