401(k) Plan Center

Understanding the Different Types of Retirement Plan Fiduciaries

Understanding the Different Types of Retirement Plan Fiduciaries

The Employee Retirement Income Security Act (ERISA) defines the roles and responsibilities of various fiduciaries for defined contribution retirement plans. In this article, we will attempt to clarify what some people consider to be a confusing situation.


Understanding the Different Types of Retirement Plan Fiduciaries

 

The Employee Retirement Income Security Act (ERISA) defines the roles and responsibilities of various fiduciaries for defined contribution retirement plans. In this article, we will attempt to clarify what some people consider to be a confusing situation.

A plan fiduciary is defined under ERISA Section 3(21) as an individual that: 1) has discretionary authority or control with respect to management of the plan or disposition of plan assets; 2) renders investment advice for a fee or other compensation (direct or indirect); or has discretionary authority or responsibility for the administration of the plan. Any plan sponsor that lacks the technical knowledge and experience to properly manage investments is required by ERISA to hire knowledgeable advisors, and historically, these advisors have been 3(21) fiduciaries.

There are two types of 3(21) fiduciaries—limited scope and full scope. Note that these terms are not mentioned in ERISA but have evolved in practice. A limited-scope fiduciary is hired by the plan sponsor to provide investment advice for a fee. A 3(21) fiduciary has the duties of recommending, monitoring, and if warranted, suggesting replacements for existing investments. Under this arrangement, the plan sponsor retains the fiduciary responsibility for deciding on the recommended investments. A limited scope fiduciary can also help create the Investment Policy Statement (IPS), advise the plan sponsor in following a fiduciary process, and provide participant education.

The full scope 3(21) fiduciaries effectively take the role of the plan sponsor in hiring and monitoring all service providers. They accept responsibility for the record-keeping, operation, and management of the plan. Normally, these duties are performed by an ERISA 3(16) fiduciary that is named as the plan administrator. In most cases, the plan administrator is the plan sponsor or a committee designated by the plan. The limited-scope model is the predominant one today.

The highest level of fiduciary responsibility for an investment advisor is an investment manager or 3(38) fiduciary. A 3(38) fiduciary is appointed by the plan sponsor to manage the investment process of the plan and has the responsibility of selecting, monitoring, and if needed, terminating investment choices for plan participants. The only entities that can accept 3(38) are registered investment advisors, banks, or insurance companies. The agreement between the plan sponsor and the investment manager must be in writing wherein the investment manager acknowledges that he is a fiduciary with respect to the plan. Note that the plan sponsor is not absolved of its fiduciary duties because it still bears responsibility for the selection of the 3(38) fiduciary.

For our retirement plan clients, Thompson Wealth Management, Ltd. agrees in writing to act as a 3(38) fiduciary. If you would like to learn more about the benefits of fiduciary protection for plan sponsors, please see www.twmltd.com.

 

 

Summary Table of Fiduciary Types:

b2ap3_thumbnail_chart.png

(Click to enlarge)

 

My Classroom Economy
TWM Rethinking 401(k) Participant Education

About Us

CLIENT ACCESS

401K PLANS

Contact Us

30 Monument Square
Suite 101
Concord, MA 01742
978-287-5151
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Parking Instructions

Social Media: