There are many reasons to hire a fiduciary to help you manage your retirement plan. While fiduciary liability is an important consideration, the primary reason to hire a fiduciary who will act in your best interest is to help you minimize your plan expenses and assist you in managing plan investments. When you start a new plan there are many important decisions that have to be made, including the type of plan that works best for your practice and Third Part Administrator selection and evaluation. For an existing plan an adviser can review your plan design and cost, and recommend ways to improve your plan, such as upgrading to a custom-designed 401(k) with profit sharing that can allow maximum possible contribution for the owners, or moving to an open architecture record-keeper that allows access to low cost Vanguard index funds.
The key aspects of your plan are investment selection and access to managed portfolios that can allow all participants, especially those who lack investment management expertise, achieve better investment results, so hiring an adviser who is proficient in investment management is extremely important. The best way to help yourself and your employees achieve better investment results is to offer individualized investment advice, which can also be provided by a fiduciary adviser. When hiring an adviser for your plan, there are several things to keep in mind:
1) An ERISA 3(38) investment manager is the highest level of fiduciary oversight for 401k plans. However, this has become a marketing gimmick for many companies, so you have to be aware what a 3(38) investment manager’s role is. A good ERISA 3(38) fiduciary will do the following:
- Assist with the selection of the appropriate plan for your business, recommend the best plan vendors (such as record-keepers and Third Party Administrators) as well as perform a thorough analysis of an existing plan with the goal of improving quality of service and minimizing cost.
- Create an investment policy statement for the plan which outlines the investment selection criteria and investment strategy.
- Select an investment lineup for the plan that contains a relatively small number (no more than about two dozen) of low cost index and passively managed funds that do not pay any revenue sharing or 12b-1 fees to the investment manager.
- Set up and manage model portfolios for plan participants.
- Set up a QDIA portfolio. This is a balanced portfolio where any participant who does not make an election is invested.
- Recommend and/or provide oversight for third party services that can provide individualized participant advice.
- Do all of the above for a flat fee (while minimizing or eliminating all asset-based fees from your plan).
Some advisers limit their services to selecting plan investment lineup only, and this by itself won’t help the plan sponsor make sure that their retirement plan is the best one possible at the lowest cost, and this also will not help plan participants to make prudent investment decisions.
2) As a plan sponsor, you have fiduciary liability for investment selection and monitoring for your plan. To limit this liability, you can hire a 3(38) investment manager. Advisers have to acknowledge their fiduciary status as a 3(38) investment manager in writing – unless they are a 3(38) fiduciary, and sign a contract with you where it says that they are taking fiduciary responsibility as a 3(38) investment manager, you have done nothing to limit your fiduciary liability – you will still remain the fiduciary in charge of investment selection and performance. If your adviser is an ERISA 3(21), plan sponsor is still responsible for supervising them and approving all of their recommendations as they are considered to be a co-fiduciary. For plans with pooled assets (such as pooled 401(k) plans and Cash Balance plans), it is critical to hire an ERISA 3(38) because they take on full discretionary responsibility for managing investments in such a plan, whereas an ERISA 3(21) does not, so all of the responsibility for managing pooled assets lies with the plan sponsor.
3) Individualized advice is one way to limit your liability with respect to losses by plan participants – if every participant has a portfolio that is selected by a fiduciary adviser, then your only liability is the selection of the adviser. However, not all plans can benefit from individualized advice because if such advice is not requested, participants are still vulnerable to making bad decisions. There are two ways to address this issue. First, plan sponsor has to make sure that all participants have had an enrollment meeting where key plan details in including investments and model portfolios are discussed. Second, the QDIA portfolio ensures that any participant who is not comfortable in making investment selections will be placed in an appropriate investment.
Sometimes an ERISA 3(38) fiduciary will team up with an ERISA 3(21) adviser (co-fiduciary) who can provide some plan services such as educational seminars, and individualized participant advice. There are several types of providers that can offer individualized advice cost-effectively, including larger companies that act as an ERISA 3(21) fiduciary in providing individualized advice related to plan investments online and via one-on-one consultations, companies that provide web/online advice only, and individual retirement plan advisers (Certified Financial Planners) who can run educational seminars and who also work with plan participants to provide personal financial planning advice (not just advice related to plan investments). However, advice provided by third parties to plan participants has to be overseen by the ERISA 3(38) fiduciary to ensure that it is of the highest quality and that it fits the needs of the plan participants.