Marcia S. Wagner, Esq.
The Do’s, Don’ts and Best Practices for 3(16), 3(21) and 3(38) Fiduciaries
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Introduction
Traditional Arrangement for Plans◦ Plan sponsor has primary fiduciary responsibility◦ Recordkeeper and TPA are non-fiduciary service
providers◦ Financial advisor is broker (non-fiduciary)
Providers of Fiduciary Services ◦ TPAs may serve as 3(16) Fiduciaries◦ Advisors may serve as 3(21) or 3(38) Fiduciaries◦ Providers may strategically adjust service models
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Employer’s Traditional Roleas Named Fiduciary
Definition of “Named Fiduciary”◦ Named in plan document◦ Employer traditionally serves in this role
Powers of Named Fiduciary◦ Managing investment menu◦ Administration of plan◦ Engaging service providers
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Employer’s Traditional Roleas 3(16) Fiduciary
Definition of 3(16) Fiduciary◦ Also known as “Administrator” under ERISA◦ Plan document must identify its 3(16) Fiduciary
Role of 3(16) Fiduciary◦ Has ERISA reporting and disclosure duties◦ Does not refer to traditional TPA firms providing non-
fiduciary services
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Engaging Fiduciary Service Providers
Selection of 3(16) Fiduciary◦ Plan document may appoint TPA to serve as plan’s
Named Fiduciary and Administrator◦ Service agreement would be required for TPA firm◦ Employer may also serve as Named Fiduciary
Selection of 3(21) or 3(38) Fiduciary◦ Named Fiduciary may appoint investment fiduciaries
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Core Responsibilities of 3(16) Fiduciary
Disclosure Duties of Administrator◦ Provide SPDs◦ Provide benefit statements◦ Provide 404a-5 participant disclosures◦ Provide plan document (upon request)
Reporting Duties of Administrator◦ Sign and file Form 5500◦ Arrange for plan’s financial audit (as necessary)
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3(16) Fiduciary’s Oversight Role
Oversight of Other Providers◦ 3(16) Fiduciary may hire other providers to assist with
participant disclosures and Form 5500◦ 3(16) Fiduciary remains responsible and must oversee
providersFlexibility for TPA Firms◦ TPA firm may provide all related services as 3(16)
Fiduciary, or hire and oversee other providers
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Special Liability and Penalty Rules for 3(16) Fiduciaries
No Delegation of Administrator’s Duties◦ Administrator cannot delegate responsibility for its
reporting and disclosure obligations◦ 3(16) Fiduciary subject to potential liability, even if
error caused by non-fiduciary service providerSpecial Penalties◦ Form 5500 Failure - $1,100 per day◦ Disclosure Failure - $110 per day
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Transferring Reporting and Disclosure Duties to TPA
Plan Document Names TPA as Administrator◦ TPA becomes responsible for participant disclosures
and Form 5500◦ Employer would not have ultimate responsibility◦ TPA potentially liable for penalties as Administrator
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Core Duties of 3(21) FiduciariesNamed Fiduciary May Appoint 3(21) Fiduciary◦ Named Fiduciary has power to hire other fiduciaries◦ Plan sponsor may hire financial advisor to provide
“investment advice” under ERISA Section 3(21)◦ Advice needed for selection and monitoring of plan’s
menu optionsReliance on 3(21) Fiduciary’s Advice◦ Named Fiduciary must not blindly follow advice◦ Plan sponsor retains duty:
(1) To investigate qualifications(2) To provide complete and accurate info(3) To ensure reliance is reasonably justified
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Overview of 3(38) FiduciariesDefinition of “3(38) Fiduciary”◦ Also known as “investment manager” under
ERISA Section 3(38)Legal Requirements for 3(38) Fiduciary◦ Must have discretionary authority◦ Must be RIA, bank or insurance company◦ Must acknowledge fiduciary status in writing
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Core Duties of 3(38) FiduciariesInvestment Control Over Plan Menu◦ 3(38) Fiduciary must have authority to unilaterally add
or remove investment options◦ Plan sponsor must give up control over menu
Liability Protection for Plan Sponsor◦ Plan Sponsor is not responsible for individual acts of
3(38) Fiduciary◦ Named Fiduciary merely responsible for prudently
selecting and monitoring 3(38) Fiduciary
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3(38) Fiduciary vs. 3(21) FiduciaryWhen Plan Sponsor Relies on 3(21) Fiduciary
◦ Both sponsor and 3(21) fiduciary are jointly responsible for plan’s investment decisions
◦ Both can be held liable for imprudent decisionsWhen Plan Sponsor Relies on 3(38) Fiduciary
◦ No fiduciary liability for Plan Sponsor if it prudently appoints 3(38) Fiduciary
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Fiduciary Liability and PenaltiesCivil Actions Under ERISA◦ May be brought by DOL, participants or co-fiduciaries◦ Fiduciary is personally liable for losses caused by
breachDOL Civil Penalty◦ Penalty amount is 20% of applicable recovery amount
Excise TaxesPotential Co-Fiduciary Liability
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Considerations for 3(16) Fiduciary Service Models
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Administrator vs. Named Fiduciary
Serving as Administrator and Named Fiduciary◦ 3(16) Fiduciary may limit responsibility to
Administrator’s reporting and disclosure duties◦ Many firms also assume discretionary authority over
management of plan as Named Fiduciary◦ Scope of responsibility determined by service
agreement and plan document
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Scope of 3(16) Fiduciary’s Services
Determining TPA’s Fiduciary Services◦ May accept responsibility for 5500 reporting and
disclosures as plan’s Administrator◦ May also accept comprehensive management
responsibilities as plan’s Named Fiduciary◦ Illustration: TPA agrees to adjudicate benefit claims
Consider TPA’s Expertise and Procedures◦ Prudent process must be established for each
fiduciary service◦ Illustration: Benchmarking review conducted to
satisfy TPA’s duty to evaluate reasonableness of fees
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TPAs and Bundled ProvidersAbility of TPAs to Offer 3(16) Services◦ TPAs are traditionally involved in plan administration◦ Can modify non-fiduciary service model by adding
3(16) Fiduciary servicesBundled Providers ◦ Recordkeepers with TPA acting as its subcontractor
may offer 3(16) Fiduciary services◦ TPA with recordkeeper acting as its subcontractor may
also offer 3(16) Fiduciary services
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Oversight of Plan’s Recordkeeper
Importance of Recordkeeper’s Role◦ Recordkeeper is typically responsible for generating
participant 404a-5 disclosures and statements◦ Also provides website and system for processing
participant transactions◦ 3(16) Fiduciary is responsible for disclosures and may
also be responsible for plan administrationWhen Plan Sponsor Hires Recordkeeper◦ 3(16) Fiduciary should require use of approved
recordkeeper to ensure plan runs properly
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3(16) Fiduciary’s Non-Fiduciary Services
Types of Non-Fiduciary Services◦ 3(16) Fiduciary may offer bundled recordkeeping and
TPA services◦ May also offer TPA services only
When Offering TPA Services ◦ 3(16) Fiduciary must coordinate its TPA services with
recordkeeper’s administrative services◦ Areas of potential overlap include preparation and
delivery of disclosures, loans and withdrawals
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When 3(16) Fiduciary Hires Non-Fiduciary Providers
Relationship with Other Service Providers◦ 3(16) Fiduciary’s ERISA reporting duties include hiring
accounting firm for audit as necessary◦ Additional duties may including hiring non-fiduciary
service providers (e.g., recordkeeper)Accountability of 3(16) Fiduciary◦ 3(16) Fiduciary has duty to prudently select and
monitor provider on ongoing basis◦ Not accountable for individual errors of provider, but
responsible for prudent selection and monitoring
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Responsibilities Retained by Plan Sponsor
Coordination of Fiduciary Responsibilities◦ Any responsibilities not accepted by 3(16) Fiduciary
remain with Plan Sponsor◦ 3(16) Fiduciary’s agreement and plan document
should be reviewed to confirm responsibilities Duties Relating to 3(16) Fiduciary◦ Plan Sponsor is responsible for prudently selecting
and monitoring 3(16) Fiduciary◦ DOL requires consideration of
(1) Qualifications of 3(16) Fiduciary(2) Quality of services(3) Reasonableness of fees
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408(b)(2) Fee DisclosuresFee Disclosure Requirements◦ 3(16) Fiduciary must describe services and fees◦ Must also identify any subcontractors and disclose
their compensationWhen 3(16) Fiduciary Hires Recordkeeper◦ Recordkeeper must provide 408(b)(2) fee
disclosures to 3(16) Fiduciary◦ Plan Sponsor should consider requiring 3(16)
Fiduciary to disclose recordkeeper’s fees◦ Should also confirm 3(16) Fiduciary is not hiring
affiliated recordkeeper or receiving “kickbacks”
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Suggested Best Practices:Scope of Fiduciary Services
Level of 3(16) Fiduciary Responsibility ◦ Offer fiduciary service only if prudent process can
be established and followed◦ Document selection and monitoring criteria when
hiring other providers◦ Prepare regular reports of other providers’ services
Advisability of Different Service Levels◦ Simpler and easier to provide uniform level of
fiduciary oversight across all plan clients
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Suggested Best Practices:3(16) Contractual Considerations
Service Agreement for 3(16) Fiduciary◦ Should state which responsibilities will shift to TPA◦ Should confirm that Plan Sponsor remains
responsible for hiring 3(16) Fiduciary◦ Plan Sponsor should remain responsible for
providing complete and accurate informationCoordination with Plan Document◦ Confirm Administrator and Named Fiduciary
provisions are consistent with agreement◦ Plan document may provide that both TPA and Plan
Sponsor will serve as Named Fiduciaries
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Suggested Best Practices:Monitoring Support for Plan Sponsor
Employer’s Duty to Monitor 3(16) Fiduciary◦ Must monitor 3(16) Fiduciary’s performance at
reasonable intervals◦ Plan Sponsor should ask for regular updates
Illustration◦ 3(16) Fiduciary provides updates on annual basis◦ Updates include summary information of:
(1) number of benefit claims adjudicated(2) exception reports identifying potential
issues(3) performance assessment of other providers(4) benchmarking analysis
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Considerations for 3(21) and 3(38) Fiduciary Service Models
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Fiduciary Service Models for Financial Advisors
Legal Requirements for Fiduciary Advisors◦ ERISA requires advisor to receive levelized
compensation to serve as plan fiduciary◦ Advisers Act requires registration as RIA before
offering advice for level, fee-based compensationSpectrum of Possible Service Models◦ Helpful to focus on 3 basic approaches:
- Core 3(21) Fiduciary- Hybrid 3(38) Fiduciary- Full 3(38) Fiduciary
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Core 3(21) Fiduciary Service ModelCore Service Provided by 3(21) Fiduciary◦ Assisting Plan Sponsor in selection and monitoring of
Plan’s investment menu options ◦ Advice is non-discretionary (i.e., recommendations)
Related Services◦ Assisting with IPS document where Plan Sponsor is
responsible for reviewing and adopting IPS◦ Providing quarterly reports and meeting with Plan
Sponsor annually◦ May also offer non-fiduciary services
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Full 3(38) Fiduciary Service ModelFull Investment Control by 3(38) Fiduciary◦ 3(38) Fiduciary has authority to unilaterally change
plan’s investment menu◦ Also has authority to make unilateral changes to IPS ◦ Provides quarterly reports to Plan Sponsor, but only
meets as needed◦ May also offer non-fiduciary services
Liability Protection for Plan Sponsor◦ Plan Sponsor only remains responsible for prudently
appointing and monitoring 3(38) Fiduciary◦ Service model preferred by Plan Sponsors that want
minimal involvement in plan investments
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Hybrid 3(38) Fiduciary Service ModelAdvantages of Hybrid Model◦ Plan Sponsor is insulated from liability for mistakes
concerning plan’s investment menu◦ Also retains indirect control over investment menu◦ 3(38) Fiduciary has discretion over menu but
discusses proposed changes with Plan SponsorPlan Sponsor’s Authority◦ Plan Sponsor may terminate 3(38) Fiduciary before
any proposed change is implemented◦ Control over IPS gives Plan Sponsor ability to impose
specific investment guidelines on 3(38) Fiduciary
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Considerations for Determining Service Model
Advisability of Different Service Choices◦ Advisor may choose to offer Core 3(21) services only◦ May also offer plan clients choice of 3(21) or 3(38)
services◦ Offering different choices may allow advisor to serve
greater range of plan clientsComparing Fiduciary Service Models◦ Same level of accountability for any bad advice
(discretionary or non-discretionary) under ERISA◦ Hybrid 3(38) model requires more coordination with
Plan Sponsor and less scalable than Full 3(38) model
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Services for ParticipantsNon-Fiduciary Investment Education◦ Asset allocation models that use plan’s investment
options may be provided if disclaimers are includedNon-Discretionary Investment Advice◦ Individualized advice should be provided on one-on-
one basis and written records should be maintainedDiscretionary Investment Advice◦ Advice may be provided in form of risk-based model
portfolios◦ Model portfolios may also be used as plan’s QDIA
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Fiduciary Benefits of 404(c) ComplianceLiability Protection Under ERISA 404(c)◦ Plan fiduciaries are not liable for losses resulting
from participant’s investment control◦ Participants must have “opportunity to exercise
control” for 404(c) purposes◦ Plan menu must have broad range of investment
alternativesEnsuring 404(c) Compliance◦ Advisor can ensure plan menu requirement is met,
but not other 404(c) requirements◦ Ask Plan Sponsor to represent that other 404(c)
requirements will be met in agreement with advisor
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Suggested Best Practices:Contractual Considerations
Investment Menu Responsibilities◦ Should define scope of advisor’s fiduciary services◦ Should specify investment areas in which advisor
will not be responsible (e.g., employer stock)Other Responsibilities◦ For any non-fiduciary services, agreement should
clarify advisor will not be acting as plan officer◦ Should also clarify if participants will be receiving
education or advice from advisor
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Suggested Best Practices:Recordkeeper Considerations
Recordkeeper’s Impact on Investment Costs◦ Recordkeeping platform determines universe of
available investment funds and their share classes◦ Different share classes have varying expenses
(e.g., 12b-1 fee, shareholder service fee)◦ Should clarify that advisor will not be responsible for
share class determined by recordkeeper’s programRecordkeeper’s Mandatory Funds◦ Recordkeeper may require use of certain funds
(e.g., proprietary TDF)◦ Should clarify advisor will not monitor such funds
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Suggested Best Practices:Special 3(38) Considerations
General 3(38) Considerations◦ Plan should transition to recordkeeper capable of
supporting advisor, including model portfolios◦ Recordkeeper may require authorization letter or
side agreement with Plan SponsorHybrid 3(38) Considerations◦ Advisor should provide notice of proposed menu
changes except in extraordinary circumstances◦ Fiduciary must have power to take any necessary
action in accordance with ERISA
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ConclusionsNo “One Size Fits All” Model for Providers◦ TPAs have flexibility in accepting Named Fiduciary
duties in addition to duties as plan’s Administrator◦ Financial advisors can serve as Core 3(21), Hybrid
3(38) of Full 3(38) FiduciariesConsulting with ERISA Counsel◦ Providers should consult ERISA counsel before
implementing any service model changes◦ Plan sponsors should consult ERISA counsel to ensure
fiduciary responsibilities are allocated properly
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Important InformationThis presentation is intended for sponsors of 401(k) plans and other types of defined contribution retirement plans with participant-directed investments that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), as well as the service providers that work with such plans.
This information is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or its affiliates.
Marcia S. Wagner, Esq.q.
99 Summer Street, 13th FloorBoston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com
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The Do’s, Don’ts and Best Practices for 3(16), 3(21) and 3(38) Fiduciaries
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