Over the years, the 401(k) plan has become the retirement plan of choice for many companies. Once the employer adopts the plan, however, they accept a myriad of responsibilities (and liabilities) they probably never anticipated. It’s commonplace for employers, especially smaller companies, to delegate many of the day-to-day responsibilities of administering the plan and managing the plan’s investments.
Regarding plan investments, the Department of Labor (DOL) gives plan sponsors/trustees the fiduciary responsibility of developing and implementing a prudent process to select, monitor and replace (as needed) investments available to plan participants. The legislation that governs all employer-sponsored retirement plans, The Employee Retirement Income Security Act of 1974 (ERISA), affords trustees the ability to offload investment-related risk in one of two ways. First, the trustee can hire an ERISA 3(21) Investment Advisor. These retirement plan advisors help plan trustees evaluate, select, and monitor an investment menu suited to the unique needs of the plan’s participants. This service is intended for plan trustees that wish to retain discretion over the investment menu. Here, the plan sponsor shares investment liability with the 3(21) Investment Advisor. The second option allows the plan sponsor to completely relieve themselves of investment-related liability for the plan by hiring an ERISA 3(38) Investment Manager. In this arrangement, the Investment Manager serves as chief investment officer (CIO) to select, monitor, and replace funds without any direction or input from the trustee. Within this arrangement, the plan sponsor delegates all investment oversight to the Investment Manager.
Plan sponsors can go a step further in reducing their liability by hiring an ERISA 3(16) Fiduciary Administrator. The Wagner Law Group, a nationally recognized ERISA law firm, defines a 3(16) fiduciary as “an administrator with ERISA reporting and disclosure duties.” Full 3(16) fiduciary services often include accepting the fiduciary responsibility for performing the vast majority of plan administration: maintaining plan documents in accordance with IRS/DOL regulations, tracking employee eligibility, ensuring communications meet DOL requirements, performing nondiscrimination testing, and sending required participant notices.
When a plan sponsor retains the services of an ERISA 3(21)/3(38) and/or 3(16), they are most often left with only three primary responsibilities: deposit employee deferrals on a timely basis, provide an annual employee census and monitor the plan’s various service providers.
What plans make the best candidates to retain a 3(16) fiduciary administrator? It’s not so much based on plan size as it is based on plan needs. It’s true that larger 401(k) plans, those with 100+ participants, are often good candidates simply based on the volume of employee needs and activity. Most often, it is plan sponsors attempting to accomplish one of two objectives: either to maintain a “hands off” approach to their 401(k) plan as much as possible, to limit their fiduciary liability related to their plan, or both.
Many plan trustees have found both maximum “hands off” of plan duties and fiduciary protection by retaining the services of both an ERISA 3(38) Investment Manager and a 3(16) Fiduciary Administrator.