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3(38) or 3(21): Which Fiduciary Service Is Right For You?

Want to reduce your fiduciary risk as a plan sponsor? A little outside help can yield big reductions in risk. Here’s a way to think through your options.

You’re trying to provide the best for the people on your company’s payroll, and you feel good about your qualified retirement plan. But what’s good for the goose — in this case the plan participants — isn’t all sauce for the gander (the company). As the plan sponsor, the company takes on substantial legal and financial liabilities. If you’re listed as the plan administrator, some of those liabilities accrue to you as well. The law suggeststhat any plan sponsor who does not possess the technical knowledge and experience to manage investments consider hiring an advisor. Your choice of advisor can significantly lower your fiduciary risk.

Why Hire a Fiduciary?

Hiring an outside fiduciary can reduce some or most of that liability by putting the plan in the hands of a professional recognized by the Department of Labor under its regulations in section 3(21) and 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). These 3(21) and 3(38) fiduciaries are not stockbrokers; instead of taking commissions on investments purchased for your plan, they’re compensated by a set fee. This helps reduce potential conflicts of interest in constructing and managing your plan’s investments.

3(38) Fiduciaryvs. 3(21) Fiduciary

There are two types of fiduciaries recognized under the ERISA standards. At it’s simplest, a 3(21) fiduciary advises and makes recommendations, but you — as plan sponsor — still have ultimate responsibility for the legal operation of the plan and approving investment choices. A 3(38) fiduciary takes over management of plan investments, making investment choices, executing investments and monitoring their performance. The 3(38) advisor is solely authorized to make (and is responsible for) those decisions. Because they have this capacity, they can often be in a position to act more quickly in terms of making any changes to the plan, since such decisions need not go through the organization’s committee for any approval process. A 3(38) fiduciary may also be advantageous for smaller firms with fewer resources in their benefits department. Hiring a 3(21) fiduciary relieves the plan sponsor of part of the labor and part of the investment fiduciary responsibility. A 3(38) fiduciary relieves most of the labor and almost all of the responsibilities. In short, whereas a 3(21) fiduciary advises and assists; a 3(38) fiduciary can function in a broader role for plan sponsors.

You’re Still Involved

Even with a 3(38) fiduciary, the sponsor is still required to provide oversight of the fiduciary. Also, hiring a 3(38) fiduciary doesn’t relieve the sponsor from liability for poor investment decisions made by participants. However, ERISA Section 404(c) does create a “safe harbor” for plan sponsors if they meet specific requirements that include stipulations regarding investment selection, plan administration and certain disclosures.

Full Service Fiduciaries

Firms that offer both 3(21) and 3(38) fiduciary services may also provide professional investment advice through staff or partnerships along with educational services to help meet the section 404(c) safe harbor standards. With the help of these outside professionals, you can lower your fiduciary risk by doing right by your employees while addressing all applicable regulations.

Fiduciary First looks forward to servicing the retirement needs of your employees. Call 866-625-4611 or email us [add link here] to arrange a complimentary consultation to discuss your organization’s need for fiduciary services and how we can help.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice.  Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.







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