The Big Scary “F” Word: FIDUCIARY

It’s easy to misunderstand the term “fiduciary” (after all, the word has five syllables). A quick Google search will tell you that a fiduciary is a person or organization that has been entrusted to act on the behalf of someone else and is legally bound to act in their best interest. What does that mean on a daily basis, though? How does that relate to an employer’s retirement plan? Let’s take a closer look.

A closer look: What is a fiduciary, exactly?

The definition above is pretty broad, so let’s explain further. When it comes to retirement plans, the employer who sponsors the plan is a fiduciary. The Employee Retirement Income Security Act of 1974 (ERISA) lays out the following as the fiduciary duties of employers (plan sponsors):

  • Manage the plan solely with the best interest of the participants (employees) and their beneficiaries
  • Ensure plan expenses are kept to a reasonable level
  • Diversify plan investments
  • Follow the plan document to ensure plan compliance
  • Perform all these tasks with care, skill, prudence, and diligence

That might sound intimidating, and we agree, it is! Luckily, the DOL recognizes that employers might not be (and rarely are) experts in retirement plan regulations and compliance. It states: “A fiduciary can hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected.” So, employers can hire a fiduciary or fiduciaries to take on certain tasks and liability for various aspects of the plan. This allows employers to reduce the workload and risk associated with their retirement plan.

The different types of retirement plan fiduciaries

There are three types of fiduciaries business owners can hire to outsource the tasks and liability of their retirement plans.

Investment Fiduciaries:

3(21) – A 3(21) investment advisor provides investment advice and expertise. If an employer hires this type of provider, they must still make the actual investment decisions. The 3(21) consultant simply acts as a subject matter expert, but does little to limit liability.

3(38) – A 3(38) investment manager is not only the subject matter expert for investments, but also takes full control of the plan’s assets and investment choices.  Therefore, hiring a 3(38) fiduciary provides more investment liability protection than a 3(21). Only Registered Investment Advisors (RIAs), banks, or insurance companies can act as a 3(38) fiduciary.

Administrative Fiduciary:

3(16) – A 3(16) fiduciary or plan administrator performs several administrative and compliance-related tasks for the plan. This type of fiduciary manages IRS and DOL compliance, along with tedious work, such as sending notices, tracking eligibility, and approving loans and distributions. 3(16) fiduciaries are often hired to simplify the management of a retirement plan for employers, along with helping reduce their risk.  

Is hiring a fiduciary or multiple fiduciaries the right fit for you?

Hiring a fiduciary is a great way to save time and minimize liability, especially if employers don’t have the time or resources to manage their retirement plan confidently. Retirement plan compliance and investments are complicated and require specific expertise. So, if employers don’t have experts on their team, outsourcing to a fiduciary can be a great option.

How can EGPS help?

EGPS provides 3(16) fiduciary services, from our credentialed, experienced, friendly retirement plan experts. We know finding a provider might seem daunting, so we offer resources around navigating the market, important questions to ask a potential provider, and more. Want more resources, including the specific tasks we remove from our clients’ plates? Fill out the form below and we’ll send you a breakdown!

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Product Development Manager

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