Jim'sMoneyBlog

Financial Opinion and Insights

What Retirement Plan Sponsors Need To Know

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

What every sponsor of a retirement plan should know is that ERISA holds them to the highest standards of being a prudent investment expert – even though they are almost never investment experts. There is a solution to this conundrum.

The Solution:   The Employee Retirement Income Security Act (ERISA), the body of law that governs qualified retirement plans such as 401(k) plans, has a mechanism by which a plan sponsor can get rid of its responsibilities and liabilities for the selection, monitoring and replacement of plan investment options.  The sponsor can do this by retaining an investment advisor that accepts transfer of these responsibilities and liabilities from the sponsor. This is done through a written contract between the sponsor and advisor in which the advisor is legally bound as an ERISA section 3(38) investment manager. By signing this contract, the advisor becomes an ERISA section 405(d)(1) independent fiduciary to the plan which makes it solely responsible and liable for its investment decisions concerning the selection, monitoring and replacement of plan investment options.   A plan sponsor, however, always retains the duty to  select, monitor and replace the investment manager.

Few Advisors Are Willing to be Fiduciaries.   Few advisors to retirement plans will accept transfer of such significant fiduciary responsibilities and liabilities.   Being a retirement plan investment manager is a highly specialized field; and, most plan sponsors would rather have independent help in selecting the manager.  This is why a great majority of advisors offer plan sponsors `quarterbacking’  in carrying out the sponsors’ investment-related fiduciary duties.  This help is generally comprised of manager search, selection, monitoring services, fiduciary oversight, etc.   None of these services do anything to help plan sponsors rid themselves of the significant responsibilities and liabilities they bear under ERISA; but they do provide the prudent process plan sponsors need in carrying out their duties; and it’s the lack of this process that usually leads to problems.

The “Co-Fiduciary” Advisor – Buyer Beware.  Not all `co-fiduciaries are really what they seem.   Since many  sponsors of ERISA-governed retirement plans have become aware that the advisors to their plans should wear the “fiduciary” label, many plan providers have responded to this by creating a marketing gimmick, otherwise known as a co-fiduciary.   The term “co-fiduciary” has been hijacked by many in the industry so that they can turn non-fiduciary broker-advisors to retirement plans into fiduciaries.   This invented co-fiduciary marketing term has nothing to do with the legal meaning of a co-fiduciary under ERISA law.  What’s worse, when the provider (record-keeper), the investment manager, and the administrator are related, the plan sponsor has lost his checks-and-balances – The fox is watching the hen house.  Not good for our poor, unsuspecting plan sponsor who thinks he’s covered – or worse, thinks his plan is ‘free’.

An advisor wearing the “co-fiduciary” label accepts no transfer of responsibilities, so mitigation comes from providing help with the installation of a prudent process for the selection, monitoring and replacement of plan investment and management options.   The plan sponsor is still holding the bag all alone and bearing all fiduciary responsibilities and liabilities; no protection from Wall Street non-fiduciary broker-advisors that wear the “co-fiduciary” label.  But, there are alternatives available:

  1. Retain an investment advisor that’s an ERISA section 3(38) investment manager and transfer significant fiduciary responsibilities and liabilities to that qualified advisor. Sponsors that do this are then no longer liable for selecting, monitoring and replacing plan investment options. 
  2. Retain a plan investment advisor that’s an ERISA section 3(21) “co-fiduciary” and receive no relief from fiduciary responsibilities and liabilities for selecting, monitoring and replacing plan investment options or retain a non-fiduciary advisor and receive no relief from any fiduciary responsibilities and liabilities at all.
  3. Retain an independent ERISA section 3(21) “co-fiduciary” to quarterback a prudent process for the screening and selection of a qualified section 3(38) investment manager for the transfer of significant fiduciary responsibilities and liabilities for the selection, monitoring, and replacing of investment options.

#3  should be an obvious and easy one when plan sponsors are informed fully about it.

Written by Jim Lorenzen, CFP®, AIF®

July 19, 2011 at 8:15 am