When selecting a suit, there are choices to be made: single or double-breasted; slim, classic or athletic fit; notch or peak lapels; center vent, side vents or no vent, to name a few. Making the right choices can be the difference between being confident or feeling unsure.

It’s the same with fiduciary protection services for clients who sponsor retirement savings plans. There are different levels of services and options. Ensuring the right fit can make all the difference in the amount of protection, confidence and flexibility afforded to the plan sponsor.

Retirement plan providers are introducing fiduciary support services with more options and choices, enhancing support and offering different levels of protection and risk management. But what makes sense for any one sponsor can vary and advisors can provide a valuable service by acting as a tailor to find the right plan to suit their clients’ needs.

Whether sponsors select a fiduciary service or shoulder the obligations on their own, ERISA section 404(c) offers plans and plan fiduciaries some protection from fallout from investment decisions. To qualify for 404(c) protection, plans must meet specific requirements, including, but not limited to:

There are other requirements as well, and plan sponsors are urged to work closely with their legal advisors and third party administrators to ensure they take the appropriate steps to keep their plans 404(c) compliant. Yet, plan sponsors may still feel the need to obtain additional protection. Financial advisors can help by reviewing and evaluating available fiduciary investment services.

There are several firms that provide such services, typically third-party advisory firms that shoulder different levels of fiduciary responsibilities providing the sponsor selects investment funds from a pre-screened list. The level of risk protection rises or falls with the level of choice and discretion the sponsor elects to retain over the investment choices.

Choosing the right fiduciary service may help reduce a sponsor’s risk, protect plan participants and ensure that the plan is being maintained in compliance with ERISA and other applicable laws. ERISA has set high standards on the roles and actions of fiduciaries, and when a fiduciary does not meet his or her duties of loyalty, prudence, diversification and adherence, it can result in steep consequences.

 

ERISA defines two different levels of fiduciary services that enhance section 404(c) protection: section 3(21) and section 3(38) services. With section 3(21) services, a “3(21) fiduciary” advisor acts as a co-fiduciary with the plan’s sponsor. The 3(21) fiduciary serves as the plan’s financial advisor and makes fund recommendations, but the ultimate discretion to implement changes and make decisions remains with the plan’s sponsor, who retains all fiduciary duties and any related liability. With section 3(38) services, a “3(38) fiduciary” not only selects the fund line-up but actually serves as the investment manager of the plan and has full discretion to implement any changes to the fund lineup. Under the 3(38) services model, the plan sponsor shifts its fiduciary responsibilities and any related liability concerning the fund lineup to the 3(38) fiduciary.

So which level of service best suits your clients? Are your clients a 3(21) or a 3(38)? As most things in life, it depends.

Some sponsors have more confidence and more experience with managing their fiduciary investment responsibilities. Some want to retain greater control and choice of investment funds. Others want to protect themselves as much as possible and are willing to give up some control to do so.

Increasingly, fiduciary investment services are providing choices within the traditional levels of support to allow for greater customization. Having different levels of fiduciary services available provides options that allow sponsors to act in the best interest of their plan—with different levels of advice and guidance—in doing so.

Most 3(38) services require sponsors to select their investment options from a specific, limited list of approved funds. However, some firms are expanding their lists of available funds to enable sponsors greater ability to tailor investment choices to their individual retirement plan. When considering a 3(38) provider, closely evaluate both the quality as well as the range of choices of investment options. 

As with a quality clothier, service matters when selecting a fiduciary service provider. A premier 3(38) service should automatically update fund choices, including at the sponsor level, to ensure 404(c) compliance. That means sponsors can take an “eye in the sky” approach, shifting the burden of monitoring investment choices for compliance to a third party.

Depending on the needs of the plan, however, the sponsor may want to exercise greater discretion over the choice of funds. In those instances, a 3(21) service may be most appropriate. With a 3(21) service, sponsors share their fiduciary investment responsibility and retain the ultimate decision-making authority. Sponsors typically are required to choose at least one investment option from each of four core asset classes (cash equivalent, domestic bond, domestic equity and foreign equity) from a pre-selected list. Sponsors are responsible for making ongoing investment line-up changes in order to maintain the core asset class requirements.

 

Advisors should check to see if a fiduciary services provider will review a sponsor’s existing investment lineup for inclusion on an approved list, particularly if the desire is to retain specific funds or even as many of the existing funds as possible. These types of reviews can help ensure sponsors include the best investments for the plan. They can also potentially reduce disruptions for plan participants by mitigating changes in investment options.

Another important function of a fiduciary service is reporting. Standard reports are better than nothing but may not be ideal. A custom report delivers the information most important to the sponsor. After all, smart decisions come from the most relevant information, so look for a provider that offers reporting specific to a sponsor’s plan.

Part of being a fiduciary is tracking information about the plan and its investments. The better fiduciary service providers now offer web portals to store information on fiduciary contacts, the sponsor’s investment policy statement and due diligence reports. Having all of the plan’s documents in one secure location is smart, convenient and safe.

Effectively managing fiduciary obligations can be overwhelming and a fair amount of proactive tracking is required to stay on top of them. Failure to meet fiduciary deadlines can even put a plan at risk of disqualification.

Some fiduciary services include resources such as educational publications and seminars, calendars of key dates with automated reminders, and other action-oriented tools. Having access to the right resources and tools to help meet fiduciary obligations can be conducive to a sponsor’s sleep and free up time to tackle other plan administration responsibilities.

Like a fine suit of clothes, a fiduciary service should be fitted to a retirement plan sponsor’s individual needs, tastes and goals. By helping tailor available services to sponsors’ needs, you can help them remain compliant in relative style and comfort.

E. Thomas Foster Jr. is assistant vice president of Strategic Relationships for Massachusetts Mutual Life Insurance Company (MassMutual).