Fiduciaries and ERISA

The laws governing compliance and responsibilities of plan administrators are outlined in the ERISA law of 1974. As defined by the DOL, “The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.”

What is a Co-Fiduciary?

A co-fiduciary is anyone who is contractually bound to act on behalf of anyone else.  The relationship consists of a Fiduciary and a Beneficiary. In the case of employee benefits administration, that’s the benefits broker or administrator (the fiduciary) and the company owners (the beneficiaries). Being a fiduciary comes with a very strict duty of care which requires that a fiduciary avoid conflicts of interest and not use their position of confidence to further their own interests. It’s a law that is attempting to govern intent and align that intent with the good of the client.

What do 3(21) and 3(38) reference?

Section 3 is the section of the ERISA law that governs fiduciaries and each parenthetical number refers to a subsection of that part of the law. Section 3(21) defines an ERISA fiduciary as someone who “exercises any discretionary authority or control regarding the management of an employee benefit plan or the disposition of its assets”. 3(21) also refers specifically to those benefits administrators who offer investment advice in exchange for compensation.

What is Section 3(38)

Section 3(38) addresses anyone with the power to “manage, acquire, or dispose of any asset of the plan”. Essentially, this section says that while 3(21) allows advice to be given, 3(38) allows that advice to be implemented. Any Benefits plan administrator with this designation is also a registered investment adviser affiliated and or registered with a bank or an insurance company.

Why choose a 3(21) Advisor?

By choosing a 3(21) investment advisor, the plan administrator or trustee shares fiduciary responsibilities with the advisor. Some call this creating a co-fiduciary relationship. However, a plan administrator or trustee may generally rely on an investment advisor for advice or recommendations, and thereby avoid fiduciary liability for those investment recommendations.

Who needs a 3(38) advisor?

If your client needs someone to control the investment of some or all of the plan assets, then your client would look to engage an investment advisor under 3(38). A 3(38) investment manager makes investment decisions. In contrast, a 3(21) advisor provides investment recommendations. In the context of a participant-directed plan such as a 401(k) plan, this means recommending or selecting the plan’s investment menu.  In selecting the investment menu, however, a  3(38) investment manager must follow an Investment Policy Statement that is prepared by the plan administrator or trustee in consultation with the investment manager. Take heed though, a client cannot hire a 3(38) manager and wash their hands of involvement in the plan: ERISA requires that the plan administrator or trustee exercise prudence and judgment in choosing the 3(38) manager.

What else is covered under section 3?

If your client needs someone to actually handle some or all of the plan administrative functions, including meeting ERISA reporting requirements, disclosure requirements, filing the correct paperwork with ERISA, and making the required disclosures to plan participants, then your client would need a third-party plan administrator that would fit the 3(16) definition. That person also has responsibilities to the plan participants as beneficiaries of the administrator’s efforts, making them fit into that general concept of fiduciary. The plan administrator under 3(16) would make some or all of the day-to-day decisions for the plan, including distributions and interpreting documents. This can reduce the administrative burden on the person named as fiduciary under the plan, and shift liability for the delegated administrative functions to the outside plan administrator. Those who do the record-keeping for the plan are generally not considered 3(16) plan administrators because they work for the 3(16) administrator and do not have the discretion to act on their own.

Compliance, in conclusion:

Finally, a client with a complex plan, or a plan with specialized needs, may want to ensure proper compliance with ERISA’s reporting and disclosure requirements by looking to engage a plan administrator, but also need to improve plan performance or mitigate investment risk by engaging an investment advisor or investment manager. In terms of understanding the various definitions under ERISA, your client should keep close to the general concept of a fiduciary, in terms of what degree of involvement and direction your client needs over the retirement plan, as well as the requirements to disclose, act with loyalty, invest and manage assets prudently and avoid conflicts of interest.