Retirement plan sponsors often assume advisors will take investment responsibility for a plan, but there is a lot of ambiguity in the advisor community about how, why and when an advisor would take on a fiduciary role. The widespread confusion on this topic has grown in recent years due to the Department of Labor’s more detailed fee disclosure reporting requirements and their impending changes to the definition of a fiduciary. As a result, many plan sponsors are asking advisors the basic question: “What value are you providing for the fees that I am paying you?”
Although you, as an advisor, are unable to completely relieve plan sponsors of their fiduciary liability, you can still demonstrate your value by assuming some of the fiduciary responsibility over plan investment selection. However, knowing what level of service to provide can sometimes be a challenge. To help you determine which shade best matches both your client’s needs and your expertise, let’s take a brief by-the-ERISA-numbers look at the three levels of fiduciary oversight advisors can assume.
1. The Limited Scope Fiduciary – ERISA Section 3(21)
If you’re hired by the plan sponsor to provide investment advice for a fee, you are considered a limited scope fiduciary. The key distinction is that the plan sponsor makes the final decision on the recommended investments, thus retaining the fiduciary responsibility (and liability) for the ultimate plan investment lineup. You, on the other hand, assume the responsibility (and liability) only for their recommendations. In this role, you can demonstrate and add value by helping create the Investment Policy Statement (IPS), reviewing and recommending investments options and providing participant education.
2. The Full Score Fiduciary – ERISA 3(21)
Full scope fiduciary is much more expansive than limited scope. The service provider who accepts this role takes on not only investment recommendations but responsibility for the recordkeeping, operation and management of the plan. Investment advisors generally do not take on these additional non-investment-related obligations as it is more akin to the 3(16) administration than it is to an investment limited scope fiduciary.
3. The Investment Manager – ERISA 3(38)
The most extensive fiduciary responsibility for advisors – at least from an investment perspective where most of the fiduciary liability concerns occur – is investment manager fiduciary. A financial advisor engaged in this role has full fiduciary responsibility for the final decisions on the selection, monitoring, and replacement of plan investments. The advisor select the investment menu, creates the Investment Policy Statement and provides participant investment education. This role is akin to being a discretionary advisor, relieving more of the plan sponsor’s liability (and giving the advisor a higher level of fiduciary risk).
To Be or Not to Be?
Many broker-dealers choose not to allow their advisors to sign on as a plan fiduciary. As an alternative, some firms designate only specific advisors or teams as ones who can fulfill the fiduciary function. Plan sponsors are not required under ERISA to select an outside investment fiduciary, so advisors who cannot or do not want to become one can still add value with participant education, investment lineup recommendations and periodic investment reviews. Or, they could assist the plan sponsor with the selection of a third party company engaged to fulfill the role of a 3(21) or 3(38) fiduciary.
Before You Talk To Sponsors – A Reminder
The plan administrator is responsible under ERISA Section 3(16) for the day-to-day operations of the plan, including such requirements as maintaining plan documents, executing governmental filings, providing participant communications and selecting service providers. No financial advisor can fill this role.
No matter how much a plan sponsor wants to avoid their fiduciary liability, they will never be able to completely eliminate it. This is because they are always responsible for selecting, monitoring, and if prudent, replacing all other fiduciaries who work with the plan. This is an important concept to convey to your clients and prospected because some may mislead the employer into a false sense of security by not being forthright in the marketing or presentations. This provides yet another way to demonstrate your value – always be clear and up-front about roles and responsibilities.
What About You?
Which numbered fiduciary should you be? A good starting point is a clear understanding of each level of fiduciary commitment and how you can fill that role. There is no one-answer-fits-all solution; you need to carefully evaluate your business model, resources and ability to provide the contracted level of service.
Whether or not you are a fiduciary, as an advisor, you can support the plan sponsor in meeting their fiduciary duties by providing investment and education assistance – thus, demonstrating your value for your fees.
Robert M. Kaplan, CFP, CPC, QPA, APA, is vice president and national retirement consultant for ING U.S. In this role, he leverages his 30 years of experience in the retirement industry to help educate a variety of stakeholders on complex regulatory topics, plan design matters, administration and sales strategies. Kaplan is a member of various industry organizations.