The Role Your Plan’s Advisor Might Play

By Marc McDowell, CRPS®, AIFA®, Director, Bronfman Rothschild Plan Advisors
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Is your advisor a fiduciary or a co-fiduciary for your plan? Or, is your advisor refusing to assume any fiduciary role? Is your business liable for your retirement plan’s investment decisions? Is your investment advisor, your plan’s investment manager? These can be confusing points of differentiation, with very different impacts to your organization’s retirement plan.

Individuals or entities who have the authority to make decisions regarding the management or investments of a retirement plan are a fiduciary for the plan, but there are different roles and levels of liability that can be assumed.

Fiduciary versus co-fiduciary

Even if your advisor is a fiduciary, not all fiduciaries provide employers with the same level of fiduciary protection. The amount of liability that you can delegate by appointing an advisor can vary greatly based on the advisor’s fiduciary role. There are two types of investment advisors that agree to serve as a fiduciary:

  • An advisor that agrees they are a fiduciary under ERISA section 3(21), but not an investment manager as defined in ERISA section 3(38).
  • An investment manager as defined in ERISA section 3(38), which by definition is a fiduciary as defined in ERISA section 3(21).
  • An ERISA 3(38) investment manager has final authority to make plan investment decisions.

No fiduciary

The majority of retirement plans tend to fall under this category. If your advisor is serving in a broker capacity, it is likely your plan’s investments are being held subject to the suitability standard, where the broker only needs to determine that the investments are suitable for your plan participants. For example, the broker may determine an index fund is suitable for your plan and recommend his company’s proprietary index fund instead of recommending a less expensive alternative. Under the suitability standard, this is permissible.

The suitability standard is a lower standard than the ERISA fiduciary standard that is applied to retirement plans. As a result, most broker-dealers will not agree to serve as your plan fiduciary. Investment decisions are fiduciary decisions, so if your plan’s broker does not take on a fiduciary role, the responsibility for your plan’s investments will fall to the employer or another fiduciary of the plan, such as the trustee.

Co-fiduciary – ERISA section 3(21) advisor

The use of a competent 3(21) advisor should result in better investment decisions and provide the employer with proof of a structured process, both of which help mitigate fiduciary risk. However, if your advisor is a 3(21) co-fiduciary, they are limited to making recommendations and providing advice. This results in the employer, investment committee, or trustee retaining responsibility and liability for making each investment decision. Appointment of an ERISA section 3(21) co-fiduciary advisor does not relieve the employer of responsibility for plan investment decisions. 2

Fiduciary – ERISA section 3(38) investment manager

The difference between an advisor serving as a co-fiduciary under section 3(21) and investment manager under section 3(38) is significant. The appointment of an ERISA section 3(38) investment manager fully delegates investment responsibility to the investment manager.

ERISA section 405(d) specifies that an “investment manager” may be appointed, and the plan trustee will not be liable for the acts or omissions of the investment manager or obligated to manage any asset under control of the manager. It is important to remember that your plan document must specifically allow for the appointment of an ERISA section 3(38) investment manager.

Proper delegation to an ERISA section 3(38) investment manager moves investment authority and responsibility to the designated investment manager. Therefore, it is important to understand how ERISA defines this role.

ERISA section 3(38) defines an “investment manager” as a fiduciary that:

  • Has the power to manage, acquire, or dispose of any asset of a plan
  • Is registered as an investment advisor under the Investment Advisors Act of 1940 and is registered as an investment advisor under the laws of the state in which it maintains its principal office; is a bank, as defined in that Act; or is an insurance company qualified to manage, acquire, or dispose of any asset of a plan
  • Has acknowledged in writing that it is a fiduciary with respect to the plan

Investment manager or investment advisor?

Entities may refer to themselves as investment advisors, yet are not ERISA section 3(38) investment managers. Service providers can be investment advisors, but are not investment managers as defined by ERISA section 3(38). These service providers can include:

  • Insurance agents
  • Broker-dealers providing investment support
  • Registered investment advisors acting as a co-fiduciary under ERISA section 3(21)

An employer cannot completely eliminate fiduciary risk, but ERISA does provide employers with tools to mitigate that risk. The appointment of an investment manager is one of the key tools available. Appointment of an investment manager, like the selection of a co-fiduciary advisor, is a fiduciary decision. An employer must be prudent in the selection and ongoing monitoring of the investment manager.

As you determine how to best manage your plan’s fiduciary liabilities, consider the differences between an investment advisor and ERISA 3(38) investment manager and identify the fiduciary role and responsibility of your plan’s advisor or provider. Bronfman E.L. Rothschild can help you fully understand your business’ retirement plan and fiduciary responsibilities.

The views and opinions expressed are based on current market conditions as of January 2015, which will fluctuate and those views are subject to change without notice. This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Bronfman E.L. Rothschild, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. Past performance does not guarantee future results.
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