Understanding Your 401k: ERISA Fiduciary Layers

by | Jan 7, 2016 | 401k & Retirement Planning

Unless you, the Plan Sponsor/Employer, are sadistic you likely haven’t delved the dense layers of the ERISA fiduciary code! Yet ERISA’s mind numbing legalese contains vital information regarding your fiduciary roles, risks, and responsibilities. If you don’t know them, how can you do what’s best for your participants and protect yourself from professional and personal liability?

“Discretion” dictates your risk and responsibility. Below I summarize three key fiduciary functions to help you understand your duties, operate in compliance, and reduce your risk.

3(16) Fiduciary: Plan Administrator

Most Sponsors serve as the Plan’s 3 (16) Fiduciary and Administrator by default, unless your Plan document states otherwise. The Administrator’s job is to ensure the Plan operates in compliance with the Plan document. However, many Plan sponsors confuse this fiduciary role with third party administration (TPAs). The difference? You can delegate many non-fiduciary administrative duties to the TPA. Still, you retain fiduciary duties such as to select and monitor service providers or to authorize distributions or loans.

When you aren’t sure of Plan document language, a knowledgeable TPA can help you interpret and understand key document provisions so that you can operate in compliance. Of course, this means you need to be aware of your Plan Document’s provisions.

3(21) Fiduciary: Investment Adviser – Know the “Scope”

ERISA Section 3(21) fiduciaries have discretionary control over the Plan’s assets, as well as their appointees. Discretion given to appointees varies by the terms of the Plan and/or appointment. 3(21) fiduciaries are often referred to as Full, Specific, or Limited Scope Fiduciaries. For this reason, Plan Sponsors must ensure they understand the scope of any fiduciary agreement.

A 3 (21) “Advisor” provides recommendations and advice regarding investment options; the Plan Sponsor has the discretion to accept or reject the advice, which carries with it the duty to monitor and replace the investments. Do you have the time and expertise?

3(38) Fiduciary: Investment Manager – Highest Standard of Care

ERISA Section 3(38) allows Plan Sponsors to delegate investment related fiduciary responsibilities to a qualified Investment Manager. This removes your investment related liability.  An Investment Manager is required to agree to fiduciary duties in writing, and is solely responsible for the selection, monitoring, and replacement of the Plan’s investment options. Some service providers market clever gimmicks like “fiduciary guarantees” which generally lack real protection. If you don’t have 3(38) in writing, you don’t have this important protection.

A 3(38) Investment Manager should not be confused with a Plan Adviser. Moreover, Investment Managers have legally defined discretion under ERISA fiduciary law to make investment related decisions which relieves you of investment related liability.

Risk Management: Know What You Don’t Know

401k plan litigation is rising. In the wake of the 2015 Tibble v. Edison, Supreme Court decision, Plan Sponsors can’t plead ignorance. You must know what you need to know. Costly conflicts of interest, despite improved disclosure rules, remain buried in fine print. Many lawsuits have resulted because the person making the decision, wasn’t the person owning the risk.

ERISA fiduciary layers can be confusing. Insist that your agreements with service providers clearly define duties and be sure to examine them BEFORE signing day.

Jerry Matecun helps business owners to understand and manage retirement plan risks and responsibilities, as well as help participants understand saving, investment, and distribution strategies vital to retirement readiness. For a no cost, confidential conversation regarding your retirement plan call or email Jerry at 949-273-4200, 616-499-2000, or jerry@compoundvalue.com.

PLEASE NOTE: Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.

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