What Every Plan Fiduciary Should Know

What every sponsor of a retirement plan should know is that ERISA holds them to the highest standards of being a prudent investment expert – even though they are almost never investment experts. There is a solution to this conundrum.

The Solution
The Employee Retirement Income Security Act (ERISA), the body of law that governs qualified retirement plans such as 401(k) plans, has a mechanism by which a plan sponsor can get rid of its responsibilities and liabilities for the selection, monitoring and replacement of plan investment options.

The sponsor can do this by retaining an investment advisor that accepts transfer of these responsibilities and liabilities from the sponsor. This is done through a written contract between the sponsor and advisor in which the advisor is legally bound as an ERISA section 3(38) investment manager. By signing this contract, the advisor becomes an ERISA section 405(d)(1) independent fiduciary to the plan which makes it solely responsible and liable for its investment decisions concerning the selection, monitoring and replacement of plan investment options. A plan sponsor, however, always retains the duty to select, monitor and replace the investment manager.

Few Advisors Are Willing to be Fiduciaries
Few advisors to retirement plans will accept transfer of such significant fiduciary responsibilities and liabilities. The great majority of advisors offer plan sponsors only “help” or “assistance” in carrying out the sponsors’ investment-related fiduciary duties. This help is comprised of monitoring services, facilitations of manager searches, checklists and other kinds of busywork. None of these services do anything to help plan sponsors rid themselves of the significant responsibilities and liabilities they bear under ERISA.

The “Co-Fiduciary” Advisor – Buyer Beware
Some sponsors of ERISA-governed retirement plans have become aware that the advisors to their plans should wear the “fiduciary” label. The retirement plan industry has responded to this by creating a marketing gimmick, otherwise known as a co-fiduciary. The term “co-fiduciary” has been hijacked by many in the industry so that they can turn non-fiduciary broker-advisors to retirement plans into fiduciaries. This invented co-fiduciary marketing term has nothing to do with the legal meaning of a co-fiduciary under ERISA law.

An advisor wearing the “co-fiduciary” label accepts no transfer of responsibilities, so there is no mitigation of liabilities for the plan sponsor. Such advisors simply refuse to accept from plan sponsors the transfer of significant responsibilities and liabilities for the selection, monitoring and replacement of plan investment options. This failure leaves plan sponsors holding the bag all alone and bearing all fiduciary responsibilities and liabilities with no offer of real help from Wall Street non-fiduciary broker-advisors that wear the “co-fiduciary” label.

There is a Clear Choice
Sponsors of retirement plans have a clear choice. Retain an investment advisor that’s an ERISA section 3(38) investment manager and transfer significant fiduciary responsibilities and liabilities to that qualified advisor. Sponsors that do this are then no longer liable for selecting, monitoring and replacing plan investment options. The other choices are to retain a plan investment advisor that’s an ERISA section 3(21) “co-fiduciary”. While this does not transfer the same level of liability, we have found that it can be a useful stepping stone for Plan Sponsors that have only had non-fiduciary investment guidance in the past.

This choice is an obvious and easy one when plan sponsors are informed fully about it.