Plancorp has worked with many business owners over the years to improve their corporate retirement plans. We have rarely come across a business owner who wanted more liability on their plate. Unfortunately, business owners frequently retain more than their fair share of legal liability—without even realizing it.
If your business has a qualified retirement plan such as a 401(k), the advisor for your plan can sign as one of two fiduciary statuses, either a 3(21) Co-Fiduciary or 3(38) Investment Manager according to ERISA law. Only one of those statuses takes the legal liability of investment selection and monitoring for the retirement plan from the business owner and transfers it to the advisor.
Here’s a breakdown of the 3(21) and 3(38) advisor designations, as well as what you should know about each as a business owner.
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Who can be a 3(38) Investment Manager?
Only a bank, insurance company, or Registered Investment Advisor (such as Plancorp) can serve as a 3(38) Investment Manager.
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Bank
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Investment Company
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Registered Investment Advisor (RIA) |
If a 3(38) Investment Manager has discretion, can they add and remove investments as they wish?
Yes, but that is not how we function at Plancorp. Before making any change to 401(k) investments, we talk with our clients about why the change is being made, how it will be made and the cost. Changes are not made without consulting our clients first. We also work with clients to prepare an Investment Policy Statement (IPS) which outlines the investment selection and monitoring process and how our Investment Committee makes decisons. Changes align with the framework set forth in this document which is reviewed at least annually.
How do I know if my advisor is a 3(21) or 3(38)?
Specifically ask your advisor if they have signed as a 3(21) Advisor or 3(38) Investment Manager. If they don’t answer directly, that is probably all the answer you need.
Do I have any liability for the retirement plan if I hire a 3(38) Investment Manager?
Yes, you still need to provide oversight of the advisor you hire to verify they are acting prudently. Other fiduciary liabilities related to retirement plans—such as making sure fees are reasonable, following the plan document and making timely contributions—continue to be held by plan fiduciaries and cannot be delegated to anyone else. A good consultant can help you understand and limit these risks, though.
