Looking for ways to minimize the fiduciary liability that comes from offering their employees a retirement plan, plan sponsors have historically turned to firms offering 3(21), 3(38) and, most recently, 3(16) expertise. Unfortunately for these sponsors, debate within the industry has raged over which approach is best and whether some of these service providers have the right qualifications.
The Center for Due Diligence spotlighted the issue at one of the sessions at its annual conference in Texas last fall.
"Many advisors are claiming 3(38) expertise to differentiate themselves when they have never before taken discretion of plan assets and have no performance history to meet the (investment) standards established by the plan," CFDD said in summing up part of the debate. "Advisory competition is creating so much noise that it is becoming difficult for a plan sponsor to identify a qualified 3(38) advisor from an impersonator."
Sponsors exploring their options should know that the level of risk mitigation can vary widely from one provider to another and that even the most careful sponsor could still find itself in violation of ERISA regulations.
Sponsors turn to these providers because they lack the time or the expertise to handle all that's required under ERISA. They typically are motivated by how much risk they can offload. But, experts say, they should be looking as closely at the qualifications of the provider as they might at the varying degrees of services offered.
ERISA's fiduciary standards of care, of course, require sponsors to act with "loyalty, care and prudence." So retaining outside experts where expertise is lacking can put a sponsor in the hot seat fast.
As the presenters at the CFDD conference pointed out, sponsors weighing one provider against the other should remember that "no one cares about your money like you do."
Outsourcing these duties no doubt reduces workload. But it could also simply lead to higher fees with no added value, increased risk for the sponsor and advisor, encourages complacency in oversight fiduciaries and, in the end, doesn't eliminate fiduciary liability.
Among the three, 3(16) fiduciaries are the latest to come into the marketplace.
Typically, these are third-party plan administrators that offer to assume fiduciary risk for a range of administrative duties, which might include everything from handling loans and distributions to choosing and evaluating trustees, investments and the plan's advisor.
Some firms offer a wide range of these services, while others offer only a few or specifically exclude some. Either way, the approach is commonly marketed to sponsors as a way to hand off a lot, if not all, of the responsibility for the plan to another fiduciary.
But, as in selecting any vendor, it's important to understand whether the provider is really qualified – and the limits to what they can offer.
"It's not that no trust companies (some of the common providers of 3(16) services) are capable of doing a good job," said Steven W. Glasgow, senior vice president at Avondale Partners, LLP, "but it's an attempt to appeal to the plan sponsors to absolve themselves of any responsibility involved with the plan. (It's a way) to sidestep the letter and spirit of the law."
"Trustees have the responsibility to make sure the plan is operated solely for the benefit of participants. How can they do that if they have no responsibility?" he asked.
