If you participate in administering your company's retirement plan, there is a good possibility that you are a plan fiduciary. We've written this post to share information to help you understand if you are a fiduciary and, if so, what that means.
What Is A Fiduciary?
Every retirement plan that is qualified in accordance with the Internal Revenue Service has a named fiduciary. However, fiduciaries can extend beyond who is named on a legal document. Generally, if you exercise discretion over your company's plan then you have status as a fiduciary. This includes staff in any functional area, most commonly: human resources, finance departments, executive management, and members of the retirement plan committee. It is important to note that fiduciary status is based on the function a person performs, not on their job title. Further, fiduciaries can also be outside the company such as a custodian that is a named plan trustee or an investment advisor.
All plan fiduciaries under the Employee Retirement Income Security Act (ERISA) are held to a fiduciary standard. ERISA summarizes five responsibilities that plan fiduciaries must satisfy:
- 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.
To help in your understanding of the different types of fiduciaries, we created a short list describing each type:
- ERISA 3(16) Plan Administrator
- ERISA 3(21) Investment advisor
- ERISA 3(38) Investment Manager
1. ERISA 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 to name a few.
2. ERISA 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. As with any aspect of administering their plan, plan sponsors without the technical knowledge and experience to properly manage investments are required under ERISA to hire that expertise.
If the plan sponsor chooses to hire expertise to help manage the investments a participant can choose from, then they would hire an investment advisor. Investment advisors provide investment advice for a fee. They recommend and monitor investments and, when necessary, suggest replacements for existing investments. The plan sponsor makes the final decision on changes to the investment fund menu. As part of their service, investment advisors may help the plan sponsor put formal processes in place that help the plan sponsor fulfill their responsibilities while demonstrating prudence.
3. ERISA 3(38) Investment Manager
An ERISA 3(38) fiduciary performs all the same tasks as an ERISA 3(21) investment advisor and has discretion to make all of the investment management decisions. Only registered investment advisors, banks, and insurance companies can be 3(38) fiduciaries.
Utilizing a 3(16), 3(21) and/or 3(38) fiduciary is a great way to shift some of the fiduciary exposure under ERISA from the plan sponsor and its fiduciaries to an outside expert. If such a fiduciary is selected with due care and diligence and is regularly monitored (trust but verify!), it will ensure a high quality level of service to plan participants, with the risk of a fiduciary claim being borne by the hired expert.
Delegating Fiduciary Responsibilities
Be sure to document your process of service provider selection! This will help you demonstrate prudence when making your decision. Additionally, it is important that once you have completed your due diligence and selected a service provider, that you (and your legal counsel) review their agreement very carefully to ensure you are all in agreement as to the exact services they will be providing and that they are agreeing to take on fiduciary status.
How Stonebridge Can Help
It can be a bit overwhelming to administer a company retirement plan, given all the documentation nuances let alone the deadlines! At Stonebridge Financial Group, we work exclusively with retirement plans and can help you with everything from designing to running your plan. Delegating fiduciary responsibilities can be a great solution for plan sponsors who lack time and the knowledge of ever-changing requirements to manage a retirement plan -- it's is all we've done since our inception back in 2004! Our robust service offering starts with ERISA 3(21) and 3(38) services and is the tip of the iceberg. We are consultants that help you with every aspect of your plan:
- Implementing cybersecurity best practices
- Ensuring participant retirement readiness
- 1:1 and group participant education and retirement readiness meetings
- Consulting on financial wellness
- Committee fiduciary training
- Process creation and documentation
- Plan design
- Contribution match modeling
- Annual plan compliance review
- And so much more
We become your outsourced retirement plan officer who dives into the morass of retirement plan details and resolves issues so you don't have to!
Please click here to schedule a short call, give us a call at (855) 530-0500 x601 or email info@stonebridgefinancialgroup.com. We look forward to helping your committee successfully fulfill their fiduciary duties with ease and excellence!