Updated: Mar 31
In the eyes of the Department of Labor, any party who has the ability to exercise discretion on a 401(k) plan decision that would affect all participants is considered a fiduciary. As many employers are beginning to recognize, this designation is not to be taken lightly as plan fiduciaries are now considered personally liable for decisions made within their role.
To ease and outsource some of this legal obligation, plan providers have looked to vendors for assistance in transferring as much of that risk off their plate and on to someone else’s. Within the Employee Retirement Income Security Act (ERISA), three possible co-fiduciary opportunities were created.
3(16) – Handling day to day administrative tasks are an important piece of a trustee's responsibilities. Working with a 3(16) co-fiduciary can help alleviate this risk. The degree of involvement varies by provider and can include tasks such as approving loans and distributions, signing off on 5500 filings, tracking eligibility, providing disclosures, or handling failed non-discrimination testing resolution. Teaming with a 3(16) professional can help avoid costly fines and penalties but based on the very broad interpretation of what services may be covered, it is important that a plan provider understand what responsibilities they have and have not offloaded.
3(21) – A 3(21) relationship is designed to function as a partnership between advisor and plan trustees. By signing on as a 3(21) co-fiduciary, that professional is recognizing their responsibility for providing advice and the inherent liability in doing so. On investment options, a 3(21) provider creates and maintains a system for monitoring investments then subsequently recommends keeping, removing, or replacing these investments. The employer then has final say on whether to implement said advice. Ideally, this keeps all parties fully engaged in the process.
3(38) – The role of a 3(38) advisor is to make all investment lineup decisions for the respective 401(k) plan they are responsible for. A 3(21) advisor responsibility stops at making a legally binding recommendation to be signed off on by plan trustees. A 3(38) advisor skips the approval step with the 3(38) provider’s choice being final. This is the largest degree in which ERISA allows for the outsourcing of fiduciary liability.
Small Yet Important 3(38) Nuance
On the surface, contracting a 3(38) advisor appears to offload all potential liability involved with investment selection. Interestingly enough, the Department of Labor has clarified that while a 3(38) advisor can absorb much of the investment liability, this does not absolve plan sponsors of their responsibility in selecting, monitoring, and holding accountable the 3(38) advisor. The added 3(38) coverage is a perk; however, it is not the proverbial “Get Out of Jail Free Card” that some might lead trustees to believe.
What Can Never Be Outsourced
There is a temptation to assume that once a contract is in place with a 3(21) or 3(38) provider, the trustees’ work is done. The Department of Labor has made it clear that plan providers will always have an obligation to monitor and hold accountable their vendors, even if other responsibilities have been outsourced. Plan sponsors remain legally obligated for justifying the selection of the co-fiduciary, monitoring their decisions, and holding them accountable for decisions being made in the best interest of all participants done for reasonable compensation.
We Do not Just Say We Are Elite 401(k) Fiduciaries, We Can Prove It
Running a 401(k) plan can be a full-time job and carries legal obligations accordingly. In our commitment to mitigating risk for our clients, Sage Rutty’s Retirement Plans Services Group underwent the rigorous review and subsequent annual auditing process to become CEFEX Certified by the Centre for Fiduciary Excellence. If you think it might be time to offload some of your fiduciary risk, Sage Rutty can help you determine what level makes the most sense for your circumstances. We have the ability to serve as a 3(21) or 3(38) fiduciary for clients to help offload their financial burden as well as partner with firms providing 3(16) offerings.