What’s in a Name? 3(38) Advisors and Different Types of Fiduciaries

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Not all fiduciaries have the same legal obligations—use this guide to tell the differences and what they mean for your retirement plan.

By Eric Sholberg, CPA

You trust your retirement plan advisor to act as a fiduciary and have your best interests in mind. But you should know that not all advisors are the same.

What is a Fiduciary?

In simplest terms, a fiduciary is a person who acts on behalf of another to manage financial assets. Fiduciaries are bound by law to act in another person’s best interests, offering unbiased advice and demonstrating a high level of ethics when making financial decisions.

The word “fiduciary” has recently become far more common in the press and among retirement plan sponsors. Sponsors and plan participants are starting to realize that many trusted providers are not fiduciaries, and that they’ve incorrectly assumed their retirement plan advisors were ethically and legally obligated to act in their best interests.

Fiduciaries are bound by law to act in another person’s best interests, offering unbiased advice and demonstrating a high level of ethics when making financial decisions.

The reality is that many advisors are not required to put plan or participant interests first. Unfortunately, hidden fees and conflicts of interest are typical in the retirement plan market.

Knowing the type of retirement plan advisor you’ve hired is a crucial part of assessing your risks, meeting your fiduciary standards, and providing the best (and most equitable) experience for your plan participants. Without this knowledge, the stakes are high—including costs of lawsuits and losses, audits and investigations, and significant fines.

Who is a Fiduciary Advisor?

A fiduciary advisor is a financial company, such as a bank or a Registered Investment Advisor (RIA), that has the responsibility to act in the best interests of another when trust, judgment, and prudence are needed. Fiduciaries put the client first, even when the client’s best interests are opposed to their own.

Unfortunately, the retirement plan industry is structured to incentivize conflicts of interest. Many brokers, consultants, advisors, and investment managers claim to act as a fiduciary, but understanding their roles is the real key in determining their legal obligation to help you.

What are the Types of Advisor Fiduciaries for 401(k) Plans?

Despite the number of retirement plan advisors claiming to be fiduciaries, there are only two types of advisors that fit the bill: an ERISA 402(a) Named Fiduciary or a 3(38) investment manager. Let’s explore the different types of advisors and their roles in your retirement plan.

ERISA 402(a)

ERISA 402(a) identifies a specific person as the plan administrator who controls the operation and administration of the plan. However, certain responsibilities can be passed on to service providers.

3(16) Plan Administrator

This role is also referred to as a recordkeeper or TPA and assumes a limited fiduciary stance.

The 3(16) Plan Administrator is responsible for day-to-day operation of the plan. The role requirements can be broad, so the scope is outlined in the plan documents. He or she is generally in charge of managing plan documents, loans, bond coverage, withdrawals, and notices.

This role is often outsourced to save time and payroll costs. Outsourcing can also reduce risk through experienced management and administration.

3(21) Investment Advisor

An investment advisor (sometimes a broker or consultant) offers advice, recommends fund lineups, and manages plan assets. Ideally, they assist the plan sponsor and help hire and monitor all service providers.

Their fiduciary obligations are usually limited, which can potentially transfer risk and administration to the plan sponsor. The investment advisor is not a decision-maker and does not have discretion over plan assets. Discretion isn’t part of a 3(21) investment advisor’s obligation to their clients, which leaves the plan sponsor responsible for investment decisions.

Don’t assume the word “advisor” means a provider is acting as a fiduciary.

Investment advisors can educate plan participants, guide the plan sponsor in meeting their fiduciary standards, track investments, recommend switching options as needed, and provide financial education to the plan sponsor.

3(38) Investment Manager

The 3(38) investment manager is appointed by the plan sponsor to manage investments and has discretionary responsibilities. They are responsible for the selection, monitoring, and replacement of investment options as needed. They will often act as a plan consultant by helping to manage other providers, as well as provide financial education.

They assume a complete investment fiduciary stance as recognized by ERISA. They must acknowledge this status in writing, as well as have a written agreement with the plan sponsor. Only an RIA, bank, or insurance company can assume this role.

Although the 3(38) investment manager is responsible for making financial decisions, the plan sponsor is still responsible for ensuring the advisor fulfills their obligations.

How to Hire the Right Advisor

Don’t assume the word “advisor” means a provider is acting as a fiduciary.

The title of “financial advisor” is just that—a title. It’s not an official designation. Only fiduciary advisors are legally and ethically required to make decisions in your best interests and those of plan participants. Brokers, insurance agents, certified financial planners, and other roles may be referred to as financial advisors, and should not be confused with a 3(38).

Hiring a contractually named fiduciary (a 3(38) investment manager) is the best way to eliminate risk and help your employees reach their retirement goals. Moreover, if you lack the technical knowledge and prerequisite experience to manage investments prudently, then you are required by ERISA to hire a qualified advisor.

Are you looking for advice specific to your situation? Reach out to our team of retirement plan advisors.

Eric Sholberg, CPA serves as a retirement plan advisor at Brighton Jones.