Fiduciary Protection: Is Your 401(k) Plan Getting the Oversight it Needs?

Within any discussion about fiduciary protection, it’s important to first identify and understand the different fiduciary roles present in a retirement plan. Under the Employee Retirement Income and Security Act of 1974 (ERISA), fiduciaries are either named in the plan document, or identified due to the functions or activities they perform with regards to the 401k plan. There are three types of fiduciaries: 3(16), 3(21) and 3(38).

Typically, the plan sponsor is the named fiduciary in the plan document. That person is normally identified as the plan administrator and has general responsibility for oversight and administration of the plan. These functions generally fall under the 3(16) fiduciary’s authority. Other fiduciaries would include anyone who exercises control or discretion over plan assets, plan management or plan administration. However, It’s the control or discretion over plan assets and the roles of 3(21) and 3(38) fiduciaries that are the focus of this article.

Generally speaking, a 3(21) investment fiduciary provides some general process control and oversight over the screening, selection, and ongoing monitoring of investments in the plan. However, even when your advisor or service provider is a 3(21), the plan sponsor still has the final say (and responsibility) in choosing the investments. In contrast, a 3(38) investment fiduciary has discretion over the fund lineup, and ultimately takes responsibility for those choices. A plan sponsor usually is not liable for the 3(38) fiduciary’s acts or omissions, but they are responsible for selecting and monitoring the 3(38).

Most plan sponsors do not have expertise in exercising discretion or control of investments. However, absent an advisor who fills that role for them, the fiduciary responsibility for selecting and monitoring investments falls solely on the plan sponsor. Many plan sponsors I have met are either unaware of this potential liability, or believe that their record keeper/TPA (third-party administrator) is assuming that role for them. In some cases, the record keeper can act as an investment fiduciary. If so, it should be specified in the contract with that provider.

Many 401k plans are sold to employers through brokers who either cannot or will not serve in a fiduciary capacity. In these instances, plan sponsors routinely assume that the broker is a fiduciary, when in reality, they are simply a service provider. The result is that the responsibility for selecting and monitoring investments in the plan falls back on the plan sponsor.

That is why you should make sure your service providers or brokers/advisors identify their roles to you in writing. This will help you determine if you are receiving proper fiduciary protection, and will also help you determine if your advisor is acting in a 3(21) or 3(38) fiduciary capacity. And since plan sponsors can be held personally liable for fiduciary breeches in the retirement plan, this is not something you want left to chance or guesswork.