roles and responsibilities of 3(16), 3(21) and 3(38) fiduciaries

The Different Roles and Responsibilities
of 3(16), 3(21) and 3(38) Fiduciaries
Marcia S. Wagner, Esq.
Plan sponsors seek to outsource fiduciary
◦ TPA Firms
◦ Financial Advisors
Fiduciary roles and responsibilities governed
◦ Considerations for service providers
◦ Considerations for plan clients
Who is a Fiduciary?
Named Fiduciary
◦ Identified in plan document.
◦ Has principal responsibility for plan.
Functional Fiduciary
Authority over plan management.
Authority over plan assets.
Investment advice for a fee.
Authority over plan administration.
Employer’s Traditional Duties
as Named Fiduciary
Definition of “Named Fiduciary”
◦ Named in plan document.
◦ Employer traditionally serves in this role.
Powers of Named Fiduciary
◦ Managing investment menu.
◦ Administration of plan.
◦ Engaging service providers.
Employer’s Traditional Duties
as 3(16) Fiduciary
Definition of 3(16) Fiduciary
◦ Also known as “Administrator” under ERISA.
◦ Has ERISA reporting and disclosure duties.
◦ Does not refer to traditional TPA firms providing nonfiduciary services.
Reporting and Disclosure Duties
of 3(16) Fiduciary
Special duties imposed on 3(16) Fiduciary.
Provide SPDs
Provide Benefit Statements
Provide 404a-5 Participant Disclosures
Provide Plan Document (upon request)
Sign and File Form 5500
Arrange for Plan’s Financial Audit (as necessary)
Employer’s Traditional Oversight Role
as 3(16) Fiduciary
Employer routinely designated as 3(16)
Fiduciary in plan document.
◦ Participant disclosures prepared by plan’s TPA.
◦ But employer retains ultimate responsibility and
should oversee TPA.
◦ If TPA prepares Form 5500, employer must sign and
remains responsible for filings.
◦ Employer must arrange for audit (for large plans only).
Overview of 3(21) Fiduciaries
Also known as Investment Advice Fiduciaries.
◦ Includes any person who renders investment advice
for a fee.
Definition of “Investment Advice”
◦ Advice relates to advisability of investing; and
◦ Either advisor has investment discretion, or
non-discretionary advice is provided as follows:
- on a regular basis,
- under a mutual agreement or understanding that
- advice will serve as primary basis for decisions, and
- advice will be individualized to needs of plan.
DOL’s Re-Proposed “Fiduciary” Definition
DOL released initial proposal in October 2010.
◦ Broad expansion of functional fiduciary definition.
◦ One-time recommendations and casual advice may
also confer fiduciary status.
◦ “Safe harbor” disclosures for non-fiduciary advisors.
DOL withdrew initial proposal.
◦ New proposed “fiduciary” definition expected from
DOL later this year.
Overview of 3(38) Fiduciaries
Definition of “3(38) Fiduciary”
◦ Also known as “investment managers” under ERISA
Section 3(38).
◦ Must have discretionary authority.
◦ Must be RIA, bank or insurance company.
◦ Must acknowledge fiduciary status in writing.
Plan sponsors can benefit from appointing
3(38) Fiduciary.
◦ Named Fiduciary is not responsible for individual acts
of 3(38) Fiduciary.
Fiduciary Standard of Care Under ERISA
ERISA establishes same standard for all
fiduciaries - “Prudent Man Standard of Care.”
Duty of Loyalty
Exclusive Purpose Rule
Duty of Prudence
Duty to Diversify
Plan Governance Rule
Applying Fiduciary Standard to DC Plans
How Standard Applies to DC Plans
◦ Duty of Loyalty: All decisions must be made solely in
interest of participants.
◦ Exclusive Purpose: Fees for investment menu and
service providers must be reasonable.
◦ Duty of Prudence: Providers and investment menu
must be selected prudently and monitored.
◦ Duty to Diversify: Menu must include broad range of
◦ Plan Governance: Procedures and guidelines must be
Fiduciary Liability and Penalties
Civil Actions Under ERISA
◦ May be brought by DOL, participants or co-fiduciaries.
◦ Breaching fiduciary is personally liable.
DOL Civil Penalty
◦ Penalty amount is 20% of applicable recovery amount.
Excise Taxes
Co-Fiduciary Liability
Fiduciary may be liable for co-fiduciary’s
breach of duty.
◦ If knowingly participates in co-fiduciary’s breach.
◦ If own breach enables co-fiduciary’s breach.
◦ If knows of co-fiduciary’s breach and fails to make
reasonable efforts.
Special Liability and Penalty Rules
for 3(16) Fiduciaries
3(16) Fiduciary cannot delegate disclosure and
reporting duties.
◦ In traditional arrangements, employer remains
◦ Employer may be subject to potential liability, even if
error caused by TPA.
Special Penalties
◦ Form 5500 Failure - $1,100 per day.
◦ Disclosure Failure - $110 per day.
TPA Firms Serving as 3(16) Fiduciaries
Plan Sponsor’s Advantage
in Hiring 3(16) Fiduciary
◦ Plan document is amended to designate third party as
3(16) Fiduciary or “Administrator.”
◦ Plan sponsor no longer responsible for reporting and
disclosure duties.
◦ Potential fiduciary liability is transferred to third party.
Transferring Reporting and Disclosure
Duties to 3(16) Fiduciary
TPA serving as 3(16) Fiduciary may also agree
to prepare disclosures and 5500 filings.
◦ TPA alone would be responsible for any
disclosure/reporting errors.
◦ Employer would not have ultimate responsibility.
◦ TPA’s service agreement may keep employer
responsible for providing accurate information.
Responsibilities Transferred to TPA as
3(16) Fiduciary May Vary
Fiduciary responsibilities transferred to TPA
may be limited to reporting/disclosure only.
◦ Plan sponsor remains responsible for all other plan
management responsibilities.
◦ TPA agrees to accept ultimate responsibility for
participant disclosures already prepared by TPA.
◦ TPA agrees to sign 5500 filings already prepared by
3(16) Fiduciary May Accept
Comprehensive Fiduciary Role
TPA may agree to accept comprehensive level
of fiduciary responsibilities.
Adjudicating benefit claims and disputes.
Manage menu of investments.
Ensuring operational compliance.
Selecting and monitoring service providers.
Ensuring plan fees are reasonable.
TPA may serve as both 3(16) Fiduciary and as
Named Fiduciary.
3(16) Fiduciary with Authority to Hire
Plan’s Service Providers
Named Fiduciary has authority to hire
◦ Employer may delegate this responsibility to TPA
serving as 3(16) Fiduciary.
◦ TPA may have oversight for non-fiduciary providers,
such as recordkeeper or auditor.
◦ May also have have oversight for fiduciary providers,
such as 3(21) Fiduciary or 3(38) Fiduciary.
3(16) Fiduciary Considerations in
Selection of Providers
Duty of prudence applies to selection of
service providers.
◦ Must engage in “objective process” designed to elicit
necessary information to evaluate:
(1) qualifications of provider,
(2) quality of services, and
(3) reasonableness of fees.
◦ In event of fiduciary breach, 3(16) Fiduciary would be
liable (or jointly liable) for any losses.
Limits on Employer’s Ability to Transfer
Responsibilities to 3(16) Fiduciary
3(16) Fiduciary may accept broad range of
responsibilities as Named Fiduciary.
◦ But employer cannot eliminate all fiduciary oversight
◦ Employer remains responsible for selection and
monitoring of TPA serving as 3(16) Fiduciary.
Employer’s Duty to Monitor
3(16) Fiduciary
Plan sponsor remains liable for monitoring
3(16) Fiduciary.
◦ Employer’s authority to amend plan document
represents power to replace 3(16) Fiduciary.
◦ Employer should review performance of 3(16)
Fiduciary at reasonable intervals.
◦ No need for employer to monitor other providers if
responsibility transferred to 3(16) Fiduciary.
Financial Advisors Serving as
3(21) Fiduciaries and 3(38) Fiduciaries
Working with Financial Advisors
Financial Advisors
◦ May provide non-fiduciary or fiduciary services.
Two Types of Fiduciary Advisors
◦ Traditionally, fiduciary advisors served as
3(21) Fiduciaries.
◦ More fiduciary advisors are willing to serve as
3(38) Fiduciaries.
Overview of 3(21) Fiduciaries
General Characteristics of 3(21) Fiduciary
◦ Provide investment recommendations and nondiscretionary advice.
◦ Acknowledge recommendations will be “investment
advice” under ERISA.
Relationship with Named Fiduciary
◦ May hire 3(21) Fiduciary to assist Named Fiduciary.
◦ But not permitted to blindly follow its advice.
◦ Named Fiduciary retains duty:
(1) To investigate qualifications,
(2) To provide complete and accurate info, and
(3) To ensure reliance is reasonably justified.
Reliance on 3(21) Fiduciary Must be
Reasonably Justified
Employer does not have to become an
investment expert.
◦ But must make effort to understand 3(21) Fiduciary’s
◦ Must examine relevant factors:
(1) extensiveness of advisor’s investigation,
(2) whether advice is supported, and
(3) whether advisor’s methods are appropriate.
◦ Must consider whether advice is independent and
Overview of 3(38) Fiduciaries
Plan sponsor may choose to hire a 3(38)
◦ Historically associated with DB plans.
◦ Offers greatest fiduciary protection under ERISA.
◦ Must have discretion to add or remove investments
from DC plan’s menu.
◦ Sponsor is not responsible for individual acts of 3(38)
3(38) Fiduciary vs. 3(21) Fiduciary
When Plan Sponsor Relies on 3(21) Fiduciary
◦ Both sponsor and 3(21) fiduciary are jointly
responsible for plan’s investment decisions.
◦ Both can be held liable for imprudent decisions.
When Plan Sponsor Relies on 3(38) Fiduciary
◦ No fiduciary liability for sponsor if it prudently
appoints 3(38) Fiduciary.
Sponsor’s Responsibility for
Selection of 3(38) Fiduciary
Fiduciary protection for plan sponsor is
◦ Sponsor remains responsible for appointment and
monitoring of 3(38) Fiduciary.
◦ Must act prudently.
◦ Must monitor performance on ongoing basis.
◦ Potential co-fiduciary liability:
(1) knowing participation in a fiduciary breach, or
(2) knowledge of breach, but failing to make
reasonable efforts to remedy breach.
Fiduciary Protection Unavailable
If Advisory Agreement Is Defective
Named Fiduciary only permitted to transfer
investment duties to “investment manager.”
◦ No fiduciary protection if requirements of
ERISA Section 3(38) are not met.
◦ Advisory agreement must have written fiduciary
◦ Agreement should also define scope of
3(38) Fiduciary’s duties.
Practical Considerations When
Working With 3(38) Fiduciary
◦ 401(k) fiduciary committee is responsible for
reviewing plan’s menu.
◦ Committee meets on quarterly basis.
◦ If 3(38) Fiduciary is appointed, committee could
continue to meet to monitor performance.
◦ May also consult with 3(38) Fiduciary.
◦ Committee is able to reduce its exposure to fiduciary
Retaining Effective Control
Over 3(38) Fiduciary
Plan sponsor retains responsibility to
terminate 3(38) Fiduciary as necessary.
◦ Advisory agreement should have “at will” termination
◦ Should permit penalty-free termination on short
Utilizing IPS to retain effective control.
◦ 3(38) Fiduciary obligated to follow IPS guidelines
under ERISA’s Plan Governance Rule.
Requiring Notice from 3(38) Manager
for Menu Changes
Notice requirement for proposed changes to
plan’s investment menu.
◦ Illustration: 60-day notice must be provided to
fiduciary committee.
◦ Cooperation is typically required to implement any
menu changes in any event.
Fiduciary Incentive to Comply
with ERISA Section 404(c)
Fiduciary protection available if plan qualifies
as Section 404(c) Plan under DOL reg’s.
◦ Participants must have “opportunity to exercise
control” and “sufficient information”.
◦ Menu must have broad range of investment
Fiduciary protection under Section 404(c) is
highly valuable.
◦ No fiduciary can be held responsible for any
imprudent allocation decisions by participants.
◦ Protection extends to 3(21) Fiduciaries and 3(38)
Fiduciaries as well as plan sponsor.
Important Considerations
◦ ERISA transfers and allocates risk differently for
different types of fiduciaries.
◦ Plan sponsors need to make informed decisions when
selecting TPAs and financial advisors.
◦ Providers should prudently consider positioning
themselves as 3(16), 3(21) or 3(38) Fiduciaries.
Important Information
This presentation is intended for sponsors of 401(k) plans
and other types of defined contribution retirement plans
with participant-directed investments that are subject to the
Employee Retirement Income Security Act of 1974, as
amended (ERISA), as well as the service providers that work
with such plans.
This information is intended for general informational
purposes only, and it does not constitute legal, tax or
investment advice on the part of The Wagner Law Group or
its affiliates.
The Different Roles and Responsibilities
of 3(16), 3(21) and 3(38) Fiduciaries
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
[email protected]

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