A fiduciary is someone who is authorized by an agreement like a trust or service agreement to act on behalf of someone, whether an individual or an entity like a retirement plan. ERISA defines three types of fiduciaries in Section 3: a Section 3(21), 3(38) and 3(16). Let’s begin with the most basic of the three, the 3(16) fiduciary.
A 3(16) fiduciary is generally referred to as a Plan Administrator and is engaged as such by an employee benefit plan or the sponsor of that plan. The Plan Administrator can be responsible for a variety of administrative functions, e.g. hiring and monitoring other plan providers, based upon the agreement between the 3(16) fiduciary and the plan or plan sponsor. The commonly referred to Third Party Administrator (TPA) is not considered a 3(16) fiduciary unless the TPA has agreed to that responsibility in their service agreement. Responsibilities of a 3(16) fiduciary can include:
- Preparing all reporting requirements, e.g. the Form 5500
- Preparing and distributing all participant disclosures, e.g. the 401(k) Safe Harbor notice
- Interpreting plan documents, e.g. eligibility
- Making decisions about plan distributions
- Making determinations about hardship distributions, QDROs, among others
A 3(21) fiduciary is anyone who exercises any discretionary authority or control regarding the management of the plan or the disposition of assets of that plan. A 3(21) fiduciary may also offer investment advice for a fee to a plan fiduciary who will approve or reject that advice, i.e. it is the plan fiduciary (the trustee or ERISA plan administrator) that makes that decision not the 3(21) fiduciary. The plan trustee and “plan administrator” as defined in ERISA, usually the plan sponsor, are considered 3(21) fiduciaries and are also considered co-fiduciaries with the 3(21) investment advisor.
The 3(38) fiduciary actually makes investment decisions for the plan unlike the 3(21) fiduciary that can only recommend investments with the final decision being in the hands of the plan trustee or ERISA plan administrator. In a plan with participant-directed investments, i.e. 401(k) or 403(b), the 3(38) fiduciary would select the plan’s investment menu, monitor those selections and make replacements if necessary. In establishing that investment menu the 3(38) fiduciary should follow an Investment Policy Statement (IPS) prepared for the plan. Even if the plan hires a 3(38) fiduciary it is still the responsibility of the plan fiduciary, either the trustee or ERISA plan administrator, to use prudence and judgement in choosing that 3(38) fiduciary.
It is clear that each level of ERISA fiduciary provides a different level of reduced fiduciary exposure to the plan fiduciaries, i.e. the plan trustee or ERISA plan administrator. In any case it is not possible to relieve a plan fiduciary from all fiduciary exposure. Ultimately the decision should be based on the level of service required considering the expertise available from plan fiduciaries or their existing providers.
Stephen Abramson, CPC APS Pension Services Inc. email@example.com