In my last article aka Part 1, I talked about some of the differences between different types of retirement plan investment advice and then spoke specifically about an ERISA Section 3(38). Knowing and understanding the differences in investment advice is crucial to proper oversight and plan sponsor fiduciary responsibility.

To summarize what a §3(38) investment manager is (but it is best to read the entire article), they have full fiduciary responsibility for the investments including creating the Investment Policy Statement (IPS), selection of menu, selection of the individual assets, and any changes to those decisions.

But not every plan needs or wants this level of advice. ERISA and the courts have stated (paraphrasing here) that if a plan sponsor does not have expertise in-house, they must hire it. You can't hire just anyone though, you must hire an expert. Not to bore you with legal speak, but I have to for a second - the ERISA regulation is affectionately known as the “Prudent Man Rule” (yes women – I know…), but the courts said this was not good enough and increased the standard to the “Prudent Expert Rule.” The DOL agreed. So no longer can a plan sponsor hire just "anyone" or even a minimum standard, they/you must hire an expert to help administer, operate and invest a retirement plan.

In this case - investments - the type and kind of expert is dependent on the skill level and knowledge of the Investment Committee, as well as, the other plan sponsor fiduciaries overseeing the plan’s investments. As I state in the Part I of this article, the answer is easy, but the government complicates it, but I digress, back to the trying to uncomplicated this.

Okay, so what are the other two (2) types of investment professional besides the §3(38) investment manager – the first is a §3(21) fiduciary. (For a side by side comparison - see Part I.) Section 3(21)s, can include brokers, as well as, registered investment advisers, banks and insurance companies. They also provide advice, however, they don’t take investment control of plan assets they don’t have authority to invest and make independent decisions, they must present it to the investment committee or plan sponsor to make the final decision. Because of this, the plan sponsor or investment committee retains the majority of fiduciary responsibility because they retain the overall authority in how the assets are handled.

The §3(21) fiduciary is there to guide, educate and assist. They bring their expert knowledge and recommendations to the plan’s investment committee and they use this information to make the final decisions and execute much of what needs to be done. Because the §3(21) makes formal recommendations and assists in the decision making they take on limited fiduciary responsibility. Like the §3(38), this fiduciary responsibility must be documented in a contract. As with the §3(38), the plan sponsor must also monitor the §3(21) fiduciaries, however, the monitoring is more regarding making sure the services in-line with their contract and their recommendations and advice are consistent with the IPS or investment guidelines of your plan. You also want to make sure they are providing you with proper documentation, they answer questions, are proactive, and answer complaints from participants …

Think of a §3(21) as a joint authority account. The investment advisor cannot make any changes without permission from the plan sponsor or investment committee. With a §3(38) they have authorization in their contract and do not need permission for each action they take.

The third and final type of “investment advice” a plan can utilize is just..well… advice. The investment person hired by the plan has no fiduciary duty. They are only there for general investment education and basic advice. They should not be making formal recommendations nor providing oversight on your plan investments or follow-up on specific investment choices in your investment menu. They will not put in writing they are a fiduciary in any capacity to the plan and will feel they are not giving you advice to rely on when you are making an investment decision. Do not rely on this advice as an “expert” opinion.

All investment related decisions to the plan are made by the Investment Committee (even if that is a committee of one). You should not to rely on their information and use it only as one piece of information. You can liken their advice to looking up the information on the internet with a personal touch.

"So with all of this, why utilize their services?'

Great question!

They are good for the plan sponsor who may have an in-house investment expert who wants another opinion or access to additional investment information, resources, education or support as it relates to investments in the plan or being considered for the plan. They can also be used as an independent third-party to help educate your participants, although your Sections 3(21) or 3(38) usually (and should) include this with their services.

They are often the least expensive due to the lower level of service and the lack of fiduciary duty they provide. Remember though, cost is only one factor when hiring. As a fiduciary you are to do what is in the best interest for your participants – many times paying a little more to get more service, more knowledge, more experience and less risk is best.