The Employee Retirement Income Security Act of 1974, better known as ERISA, specifies different types of fiduciaries for employee benefit plans. These fiduciaries are responsible for managing the plan in the best interests of participants.
ERISA includes specific reporting and disclosure requirements for each of the different types of plan fiduciaries, or advisors. Under the law, advisors can be held liable if they don’t fulfill their fiduciary responsibilities.
Roles of Plan Advisors
There are three types of retirement plan advisors. Each serves a different role in the management and administration of an employee benefit plan.
- 3(16) advisor—This advisor is responsible for overseeing plan administration and daily operations. The 3(16) advisor’s tasks include distributing summary plan descriptions, benefit statements and required disclosures to participants; maintaining and interpreting the plan document; ensuring timely deposit of participant contributions; fulfilling reporting requirements; and soliciting and enrolling new members.
Many plan sponsors opt to hire an outside third-party administrator to handle these responsibilities. It’s important to note, however, that doing so does not relieve sponsors of their fiduciary duties and associated liabilities. You are responsible for overseeing the performance of the service provider and monitoring fees to ensure that they are reasonable.
Third-party administrators generally will not agree to be named the plan administrator in the plan document or to sign Form 5500. As the plan sponsor, you will retain responsibility and fiduciary liability for administering all other plan duties, as well as monitoring the prudence of the Section 3(16) administrator selection.
- 3(21) advisor—This advisor serves as a financial advisor to the plan. The role of a 3(21) advisor is usually filled by an outside investment professional who offers services in exchange for a fee. Typically, a 3(21) advisor will offer advice and make recommendations about the investment of plan assets. This advisor may also help ensure that the plan is complying with the investment-related sections of ERISA.
The level of involvement of a 3(21) advisor can vary but falls short of actually making investment decisions—the plan administrator or investment committee is responsible for this. For example, a 3(21) advisor might present a list of investment options to a plan committee that align with the plan’s objectives. This limits the fiduciary responsibility and liability of a 3(21) advisor.
- 3(38) advisor—This is similar to a 3(21) advisor, but this advisor goes beyond just offering investment advice and recommendations. A 3(38) advisor has the authority to actually make investment decisions and purchase investments. Only banks, insurance companies and RIAs can serve as 3(38) advisors.
A 3(38) advisor has full fiduciary responsibility and liability to manage the plan’s assets and make investment decisions in the best interests of participants. The 3(38) advisor must maintain transparency about investment decisions made—this includes providing investment performance reports to the plan sponsor.
While the 3(38) advisor has the final authority to make investment decisions for the plan, the 3(16) fiduciary—whether this is the plan sponsor or a third-party administrator—can replace the 3(38) advisor if performance is deemed unsatisfactory.
When working with a 3(38) advisor, make sure plan participants are receiving sufficient education and advice from the advisor. It might make sense to choose an independent 3(38) advisor that is not limited in its selection of mutual funds, ETFs and other investment choices.
Meeting Your Fiduciary Obligation
It’s critical to understand the different types of retirement plan advisors and the roles they serve. This will help ensure that you fulfill your fiduciary duty as a retirement plan sponsor.