Professional Fiduciaries – Do We Need One?

Professional FiduciariesThe answer depends on your plan’s status and complexity and your named fiduciaries’ levels of knowledge, time commitment, and comfort level. For example, if your fiduciaries are not comfortable making the plan’s investment selections themselves, they might want to consider professional assistance for an extra level of protection. The Employee Retirement Income Security Act (ERISA) allows for the transfer of some fiduciary responsibility for a retirement plan, such as a 401(k) or 403(b) plan, to a professional fiduciary.

In the past 10 years, we have seen an increase in the use of professional fiduciaries by plan sponsors. Several of these professionals are actively marketing their services to plans. In light of this increasing use, we also see some plan sponsors making incorrect assumptions about the level of protection they are actually obtaining. This article briefly describes the types of services, as well as the level of fiduciary protection, if any, that each provides. The different titles originate from the number of the paragraph within ERISA that includes each definition.

As with all matters of discretion, your plan fiduciaries ought to carefully ensure that those they consider hiring really do offer the service and protection your plan needs. There are some very key differences in the actual level of plan services being marketed, as well as the legal level of fiduciary protection provided. Remember that some fiduciary actions can never be delegated—specifically, the very act of selecting a third party to delegate fiduciary responsibility to is one of those actions that cannot be delegated. So what fiduciary protection might be available?

First, ERISA section 3(38) refers to a registered investment manager who contractually accepts fiduciary liability. That is, the 3(38) has discretion to select, monitor, and replace non-performing plan investment funds. To operate as a 3(38) fiduciary, the provider must be a registered investment advisor, bank, or insurance company and must acknowledge its fiduciary status in writing. Be sure to include both the appointment of a 3(38), as well as their acknowledgement of fiduciary status in your service agreement with the 3(38). Remember that it is still the responsibility of the named fiduciary (generally the employer, board, or plan committee) to appoint and oversee the 3(38) fiduciary to ensure that the 3(38) is performing the service consistent with the contract and the investment policy given to them by the sponsor. The sponsor does not, however, have to monitor each investment decision or otherwise micromanage a 3(38) fiduciary.

Some plan sponsors may believe they have retained the services of a 3(38) fiduciary when, in fact, they have not. There are also investment consultants available that may be hired as 3(21) fiduciaries. This level of consultant only makes recommendations to the plan sponsor on which investment fund offerings should be selected for the plan. The decision to accept or reject those recommendations remains with the sponsor and, as such, so does the execution of the decision and the corresponding fiduciary liability. In this scenario, the investment consultant is considered a 3(21) fiduciary with the plan sponsor. On occasion, a plan sponsor believes they have hired a 3(38) fiduciary when, in fact, their contract only provides for 3(21) fiduciary status.

Also offering investment services to plans are non-fiduciary registered investment representatives. Their services and expertise may be helpful, but be aware that they do not share fiduciary status. Know what service and protection you are getting before you enter into any contract for plan services.

Should your plan consider using a professional fiduciary? If so, shop around so that you may prudently and thoughtfully compare available services. Be sure you know what services and protections you need and are acquiring. Finally, while MSEC never acts as a fiduciary to a member’s retirement plan, we may consult, advise, and educate plan sponsors, committees, and boards about plan operations and compliance.

Our labor and employment attorneys partner with you to understand your business needs, your priorities, and your legal issues. As a result of that partnership we have a clear understanding of how to best respond to your workplace issues and minimize your liabilities.

If you have questions, call 1.800.884.1328 or visit our website at