Who’s the Fiduciary?

While the DOL’s fiduciary rules for financial advisors are new, fiduciary standards among 401(k) plan sponsors are not.

Even before the new DOL rules, plan sponsors were targets of lawsuits regarding the 401(k) plans offered to their employees. To avoid such ugly situations, it’s more important than ever for retirement plan sponsor to understand the responsibilities involved in being a fiduciary.

What is a fiduciary?

According to the Department of Labor, someone is a fiduciary if they perform certain functions with regard to the 401(k) plan. These include discretion over a plan’s administration as well as the selection of the plan’s assets. The focus is on the functions performed with regard to the plan.

Plan fiduciaries must:

  • Act solely in the best interest of all plan participants
  • Execute their duties prudently
  • Follow the specifications of the plan’s documents
  • Diversify the plan’s investments
  • Pay only reasonable plan expenses

Delegating fiduciary responsibilities

Plan sponsors can hire outside service providers to share in their fiduciary responsibility, however, they cannot abdicate this responsibility.

Here are a few types of fiduciary roles these service providers can assume.

A 3(38) fiduciary has the full discretion to make all plan decisions, including the those regarding the investments offered.

In this capacity, advisors are the decision maker for the plan’s investments; they are not merely offering suggestions. The plan sponsor’s fiduciary obligations are more limited here than for other arrangements, but it does have the responsibility to select the investment manager and to ensure that the chosen manager is properly executing the plan’s fiduciary duties.

A 3(21) fiduciary typically recommends investments to the plan sponsors, monitors those investments, and makes recommendations when investments need to be replaced. The final decision, however, lies with the plan sponsor. 3(21) advisors provide counsel and guidance to the plan sponsor, but they do not exercise discretion over the plan investments as a 3(38) does.

A 3(16) fiduciary must ensure that the plan is created and managed according to the ERISA rules. This is typically a role filled by a third-party administrator, either in an unbundled setting or as part of a bundled plan. If there is no outside administrator, then this role must be filled by the plan sponsor.

Using outside service providers

Typical service providers include an investment advisor and a third-party administrator.

VestWell can help you offer a top-notch plan even to your smallest plan sponsor clients. We can act as a 3(38) fiduciary via our arrangement with Palladiem. We can serve as a 3(21) advisor in partnership with you via our relationship with Morningstar. We can also support you as the 3(21) advisor with our cutting-edge administrative capabilities.

Additionally, we can help you offer your clients plan design options including new comparability plans, 403(b) plans and even a cash-balance pension option.

It makes sense to partner with experts in this area to enable sponsors to meet their fiduciary obligations. You can help plan sponsors offer a plan that meets their goals of attracting and retaining employees while helping their employees meet their retirement goals. Hiring the right partners allows the sponsor to focus on what they do best: growing their business while mitigating their fiduciary liability. And it makes you look really good as their advisor!