Prudent Fiduciary Part I Scott Pritchard | Managing Director, Advisors Access
A look at the major issues that are shaping fiduciary best practices today. First, let me say that I am not an attorney. So, as I wade into
interpretation of ERISA, I gratefully acknowledge my reliance on the previous
work and wise counsel of numerous ERISA attorneys who have been kind enough to
share their opinions with me.
With that disclosure, I will attempt to shed light in a two-part series on an
issue that is receiving an increasing amount of attention in the 401(k)
marketplace: The roles of ERISA section 3(21) fiduciary investment advisors and
section 3(38) fiduciary investment managers.
The growing awareness of these roles seems to be driven by two key factors: - Numerous 401(k) lawsuits over
the past few years have made plan sponsors increasingly aware of their
fiduciary responsibility and liability, which they are now keenly
interested in limiting.
- The investment industry is
aware of this growing concern and is seeking to capitalize on the
"fiduciary" business opportunity.
While ERISA has always defined the various roles of fiduciaries to
retirement plans, most industry practitioners have simply not been aware of the
finer points and how those can benefit plan sponsors and participants. Now,
however, as more plan sponsors seek out the services of fiduciaries, Wall
Street is increasingly marketing itself as such, especially under the
"co-fiduciary" label. So it is imperative that plan sponsors, and those that
advise plan sponsors, understand the key differences between the various
fiduciary roles. There are a variety of functional fiduciaries in the operation of a
qualified retirement plan, including the plan administrator, trustee(s) and
members of the investment/benefits committee. Our focus here, however, will be
on clarifying the roles of "Investment Advisor" and "Investment Manager."
In a white paper commissioned by SageView Advisory Group, attorneys Fred Reish
and Joe Faucher of the Reish & Reicher law firm explained the 3(21)
Investment Advisor and 3(38) Investment Manager roles this way: Where committee members
lack the needed technical knowledge to properly select the investments, they
are required to hire knowledgeable advisers. In ERISA, those investment
advisers are sometimes referred to as section 3(21) fiduciary investment
advisers. However, while the use of knowledgeable advisers is evidence of a
prudent process (particularly if the adviser is independent), the committee
continues to be the primary investment fiduciary. As a result, it remains the
primary "target" for plaintiffs' attorneys and the U.S. Department of Labor
(DOL). Where committee members
desire additional protection, they should consider appointing a discretionary
investment manager to select and monitor the investments. In ERISA, those
discretionary managers are referred to as 3(38) fiduciaries. Appointing an
investment manager insulates the fiduciaries against losses (or inadequate
gains) arising out of claims that the investments were not appropriate or
prudent. Fiduciaries who appoint an investment manager to control the selection
and monitoring of the plan's investments are responsible only for the prudent
selection and monitoring of the investment manager which, for attentive
fiduciaries, is a manageable task. The essence of the difference between these two designations is that a 3(21)
advisor makes recommendations and a 3(38) manager makes decisions.
So, if a plan sponsor wants to retain the responsibility for investment
selection and monitoring, hiring a 3(21) investment advisor can be part of a
prudent fiduciary process. But if a plan sponsor wants to be insulated from the
responsibility and liability for investment selection and monitoring, then a
3(38) investment manager should be engaged.
Most groups holding themselves out as "investment advisors" in the 401(k)
industry are operating as 3(21) advisors (if, indeed, they are acting as
fiduciaries at all.) The 3(38) manager designation requires a greater level of
fiduciary responsibility, and only a minority of firms are willing to accept
the increased liability that comes with the 3(38) designation.
In Part II, I will provide guidance on how to identify what type of fiduciary
you may be working with now. |
