Broker Check
Is Your Retirement Plan Advisor Really a Fiduciary?

Is Your Retirement Plan Advisor Really a Fiduciary?

November 09, 2023

When it comes to reviewing their retirement plan offering, many plan sponsors don’t know where to start. Between all the different vendors, funds, and associated fees, it can be challenging to confidently conclude how well your plan is actually performing. 

As the 401(k) industry has evolved, vendors - particularly retirement plan advisors - have adopted the use of buzzwords like “fiduciary” to describe their level of expertise in the 401(k) realm. However, the term fiduciary is oftentimes used in an attempt to obfuscate their role in the retirement plan. 

As a plan sponsor - and a fiduciary in the truest sense of the word - you should know that not all fiduciaries are created equal. Depending on the type(s) of advisor you have on your plan, the level of service you and your participants receive can vary greatly. And yet a recent study found that - of the plans that had an advisor - nearly 25% of plan sponsors didn't even know what type of advisor they had on their retirement plan.

With that said, let's familiarize ourselves with the different types of retirement plan fiduciaries and see how they compare. Then we can determine which type makes the most sense for your plan.

Types of Retirement Plan Fiduciaries

1. The Plan Sponsor

While maybe not traditionally considered a tier of fiduciary, it cannot be understated that there is no higher degree of responsibility (or liability) for the retirement plan than that of the individual or committee who is sponsoring the plan. 

Above all else, it is these individuals’ sole responsibility to ensure the plan is performing at a suitable and reasonable standard and that all vendors associated with the plan are sufficiently performing their duties. While the role of the retirement plan advisor is to give sound advice to the plan sponsor on investment options, plan design features, and vendor selection, it is ultimately the plan sponsor’s decision on whether or not to act on that advice.

The primary reason the plan sponsor tops this list is because they are the ones who are directly liable should any litigation be brought against the plan. That is unless the plan enlists the services of a 3(38) investment manager.

2. A 3(38) Fiduciary Investment Manager

Aside from the plan sponsor, when it comes to investment management, the highest-level plan fiduciary is the 3(38) Fiduciary Investment Manager. The number 3(38) refers to ERISA section 3(38), which states that investment managers have discretionary authority as fiduciaries, must be structured as either an RIA, a bank or an insurance company, and must specifically acknowledge their fiduciary status.

More importantly, as alluded to earlier, the 3(38) Investment Manager assumes full fiduciary responsibility and liability for selecting, monitoring, managing, and benchmarking the plan’s investment offerings. Depending on the plan design, other duties of the 3(38) investment manager may include:

  • creating and managing the Investment Policy Statement (IPS)
  • forming the Investment Committee
  • holding Investment Committee meetings.
  • providing education services to plan participants via group and individual consultation sessions
  • informing participants about their plan’s features (such as auto-enrollment, employer match, loans etc.)
  • Providing education on investment selections

3. A 3(21) Fiduciary Investment Advisor

The 3(21) fiduciary also contributes significantly to the management of an employer-sponsored retirement plan. Similar to the 3(38), a 3(21) fiduciary’s role is also centered around helping the employer make informed decisions about the plan's investments, but they do not have the final authority to make investment decisions on behalf of the plan. 

The main difference between 3(38) and 3(21) fiduciaries is the level of responsibility and liability they take off the plan sponsor’s plate when it comes to the plan’s investment options. While the 3(38) assumes full responsibility and liability for the investments, the 3(21) merely shares in the responsibility and liability with the plan sponsor. In a nutshell, a 3(21) typically helps the plan sponsor fulfill their fiduciary responsibilities by offering expert guidance and documentation of their investment decisions. This is crucial to ensure that the employer is acting prudently and in the best interests of plan participants.

To help remember the difference between the two, the 3(38) investment manager is often considered the “do it for me” fiduciary while the 3(21) fiduciary is commonly referred to as the “help me do it” fiduciary.

In addition to the services provided regarding the plan investments, the 3(21) fiduciary may also assist with participant education and communication, helping employees understand the investment options available and make informed decisions about their retirement savings.

4. A 3(16) Fiduciary

The lowest of the fiduciary ranks belongs to the 3(16) fiduciary. Otherwise known as the Plan Administrator, their main purpose is to help relieve the plan sponsor of some of the day-to-day burden and liability associated with administering an employer-sponsored retirement plan. 

Some of the most common tasks a 3(16) can assist with may include:

  • Determining employee eligibility
  • Providing disclosures and statements to participants
  • Approving and processing loans and distributions
  • Signing and filing annual 5500 forms (as required)
  • Addressing any clerical errors in the plan paperwork related to compliance, nondiscrimination, and ADP/ACP testing.

It is worth noting that some plan administrators will only take on certain duties, leaving others to the employer to manage or outsource to another partner. Further, even the highest level 3(16) fiduciaries do not relieve the plan sponsor of all liability. It is still the plan sponsor's responsibility to monitor the 3(16) and make sure their fees are reasonable.  As outlined in the services provided by the 3(16), their duties do not extend to services related to investment management.

Finding a Fiduciary Fit

One of the most important decisions a 401(k) plan sponsor has to make is selecting the right partner to help them manage their plan. Every plan is unique and comes with its own set of requirements. 

However, the one aspect that remains constant across all the plans is the requirement of all associated vendors to work in the best interest of the plan participants. When it comes to choosing between retirement plan advisors, many advisors advertise themselves as fiduciaries, but the level of fiduciary services they are able to provide matters!

If you are currently working with a fiduciary advisor, or if you are unsure if your current advisor is really living up to the level of services they say they are, we can help. Request a FREE Plan Analysis with one of our experienced Fiduciary Investment Managers today and find out.

Or book an Intro Call with one of our advisors below!

This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does the advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.