I Administer a Retirement Plan. Am I a Fiduciary?

Yes. If you administer a retirement plan, you are a fiduciary. However, it’s not quite as simple and straightforward as that. There are different kinds of fiduciaries and it’s important to understand each of their functions.

What Is A Fiduciary?

First of all, what is a fiduciary? A fiduciary to a retirement plan is an individual or entity who manages a retirement plan and it’s assets. Every employer who sponsors a retirement plan is a fiduciary. Fiduciaries can also include the human resources department, an internal retirement plan administrative committee, a third-party administrator, plan trustees, investment advisors, and those who select any of the above.

Anyone who uses discretion in administering or managing a plan, or in controlling the plan’s assets, is a fiduciary. Fiduciary status is based on the function a person performs, not on their job title. Attorneys, accountants, and actuaries are generally not fiduciaries when acting only in their professional capacities. Whether or not someone is a fiduciary all comes down to if they exercise discretion and control over the plan.

All plan fiduciaries under the Employee Retirement Income Security Act (ERISA) are held to a fiduciary standard. These are the five things that fiduciaries must do to live up to the law’s standard of conduct:

  • Act in the sole interest of plan participants and beneficiaries
  • Act prudently
  • Use plan assets only for paying benefits and defraying reasonable costs of administration
  • Diversify investments
  • Act in accordance with the plan document

Different Kinds Of Fiduciaries

There are two overarching kinds of fiduciaries, named and functional. Under ERISA, the plan document must actually name a fiduciary that is ultimately responsible for the retirement plan. Named fiduciaries are then allowed to delegate responsibilities to others who become fiduciaries based on their actions. These are functional fiduciaries.

ERISA specifies three different kinds of functional fiduciaries. Each one is named after the section of law in which it is found.

3(16) Plan Administrator

A 3(16) fiduciary can be the plan sponsor, a designated committee, or a third-party administrator hired by the plan sponsor. This fiduciary is responsible for the day-to-day activities of the plan. Some of these activities include determination and transmittal of contributions; review, approval, and processing of loans and distributions; the preparation of Form 5500 and related schedules; and annual compliance testing.

3(21) Investment Advisor

ERISA defines a 3(21) fiduciary as someone that has discretionary authority or control with respect to management of the plan or disposition of plan assets; renders investment advice for a fee or other direct or indirect compensation; or has discretionary authority or responsibility for the administration of the plan. Plan sponsors without the technical knowledge and experience to properly manage investments have to hire advisors who then become 3(21) fiduciaries.

These fiduciaries provide investment advice for a fee. They recommend and monitor investments and, when necessary, suggest replacements for existing investments. A 3(21) fiduciary makes recommendations and the plan sponsor decides whether or not they want to follow them. They can also help create Investment Policy Statements, give advice on fiduciary processes, and provide participant education.

3(38) Investment Manager

A 3(38) fiduciary is like a 3(21) in that they deal with investments, but they have much more responsibility because they make all of the investment management decisions. Only registered investment advisors, banks, and insurance companies can be 3(38) fiduciaries. To do so, they must agree in writing to assume the liability of selecting and monitoring the investments of the plan. With a 3(38) fiduciary, the only investment-related decision the plan sponsor makes is who to hire.

Delegating Fiduciary Responsibilities

As a plan fiduciary, you can delegate responsibilities to any of the three kinds of fiduciaries named above to help reduce your liability. When doing so, you need to make sure your service providers agree in writing to take on fiduciary status. Often, plan sponsors think their providers are fiduciaries and have taken on some of their liability when legally they haven’t.

Delegating fiduciary responsibilities can be a great solution for plan sponsors who lack the time and knowledge to manage a retirement plan and choose prudent investments. At Stonebridge Financial Group, we can work with you and your plan as either 3(21) or 3(38) fiduciaries. We are investment specialists who can provide you with recommendations or simply aim to handle everything for you. If your retirement plan’s investments need guidance, call us today at (855) 530-0500 or email [email protected]lgroup.com.

About Brad

Brad is the Managing Partner of the retirement plan consulting business at Stonebridge Financial. Since 2004, he has dedicated his time and energy to helping his clients build and manage highly effective retirement plans. Working with closely held businesses, publicly traded companies, and non-profit organizations, Brad evaluates existing retirement plans to develop success goals. Collaborating with his clients, he makes improvements while maintaining the highest degree of fiduciary prudence and process.