Outsourcing Fiduciary Responsibilities

Retirement Plan Consulting

Apr 17, 2024

The fiduciary duty to a corporate retirement plan requires many different levels of responsibility. As the industry has evolved and retirement plans have become a higher priority for government regulation, the retirement plan service providers are offering opportunities to share or in some cases completely offload fiduciary responsibilities. While some of these services may be attractive, it is important to understand the different options and the responsibilities that remain when utilizing these services.

3(21) Co-Fiduciary

This pertains to the investment selection and monitoring. Under this arrangement, the investment advisor signs on as a co-fiduciary. The advisor has no discretion over the assets meaning that he or she needs the permission of the plan sponsor before making any changes. The advisor provides recommendations, but the plan sponsor has the final say. At this point, most investment advisors should be operating in this capacity unless the plan sponsor prefers to completely offload the investment selection and monitoring.

3(38) Fiduciary

This would be the next level up for the investment management piece of the fiduciary duty. The investment advisor takes discretion of the plan assets and assumes the responsibility of the investment selection and monitoring. The 3(38) fiduciary can make changes to the fund lineup without presenting the changes to the plan sponsor. The final say is fully delegated. The plan sponsor is still responsible for monitoring the 3(38) fiduciary and being able to document the due diligence in selecting the investment manager.

3(16) Fiduciary

While 3(21) and 3(38) apply to the investments in the plan, 3(16) applies to the administration of the plan. Generally speaking, these services are usually offered by third party administrators. Under this arrangement, the plan sponsor can offload essentially all administrative duties to a 3rd party including the signing of the form 5500. It is fairly new and is just being introduced to many plan sponsors and advisors. It is important to clearly understand what duties are being taken over by the fiduciary and what duties are still the responsibility of the plan sponsor. Furthermore, the plan sponsor still has a duty to monitor the service provider and document the due diligence.

Are these services right for your plan? The answer to this and most financial questions is “it depends.” At the very least, you should have a 3(21) investment advisor who is willing to act as co-fiduciary for the investment decisions. However, you have to think about what is best for you and your employees. If you don’t have the time or the desire to deal with the plan administration, maybe a 3(16) service provider could be the answer for you. If you don’t want to make any investment decisions, perhaps you should interview some 3(38) investment managers. Regardless of your situation, it is important to understand the services provided to you, the costs associated with them and the impact on your plan participants.


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