Spotlight on Advisors: Fiduciary Types
We’re starting a new series about advisors. Let’s cut to the chase. You're juggling a million things, and your retirement plan advisor might be adding to the stress, not alleviating it. You're looking for concrete ways to evaluate their performance, and you're hoping to find real reasons to keep them or switch. With employees depending on you in your position as a fiduciary, getting this right is crucial.
A recent question was posed: Do we have a list of things that a good plan advisor should be doing? Yes, we do in fact have such a list. However, it’s important to note that there’s always going to be some variance in the types of services offered as well as the quality of services.
First things first - a plan advisor should be providing investment advice on your retirement plan, since they should be taking on the fiduciary responsibility for selecting and monitoring the funds in the plan. Let’s break down key types of investment fiduciaries.
ERISA 3(21) NonDiscretionary Fiduciary: Advisor as a Guide
Think of this as advisory support. The advisor provides recommendations and options, but you make the final call on what fund is selected and put in the plan. While they bear responsibility for the options they provided, you bear the ultimate responsibility for the selection and implementation.
What to look for: Are they providing well-researched, documented recommendations? Are they responsive to your questions? Are they clearly outlining the risks and benefits of each option? Are they tailoring it to your employees and making a cohesive lineup?
How they could miss the mark: They provide vague advice, lack a clear investment strategy, fail to schedule regular meetings, don't back up recommendations with data, use excessive jargon without clear explanations, have conflicts of interest, or leave you feeling uninformed and uncertain about your choices.
ERISA 3(38) Discretionary Fiduciary: Outsourced chief investment officer
The 3(38) discretionary fiduciary has the authority to make investment decisions without your direct approval or input. The 3(38) discretionary fiduciary takes on the liability for investment decisions. HOWEVER, you can never fully abdicate your fiduciary responsibility as a plan sponsor – you still have a duty to monitor your advisor, have periodic meetings with them, and make sure they’re doing their job, just as you would with any service provider you hire.
What to look for: Are they proactively managing the plan? Are they providing regular performance reports? Are they demonstrating a clear investment strategy? Are they holding regular reviews?
How they could miss the mark: You’re caught off guard by investment or fund name changes, they fail to provide reports or other evidence of meeting their contracted services, they lack a clear investment strategy, they have conflicts of interest in their recommendations, they are unresponsive, the target date series don’t have the latest vintages added, or they provide generic investments that do not fit your company’s specific needs.
ERISA 3(16) Administrative Fiduciary: Handling the Paperwork
While often mentioned alongside 3(21) and 3(38), and included here for plan sponsor awareness, the 3(16) administrative fiduciary role is typically outside the scope of services offered by investment advisors. These tasks are instead managed by a third-party administrator or, in some cases, the recordkeeper. ERISA 3(16) fiduciaries take on the administrative duties of a retirement plan, such as signing government forms, sending plan notices, and assuming liability for the plan's administration.
What to look for: If they offer this service, how are they handling compliance and paperwork accurately and efficiently? How far does the liability extend? What does their contract dictate about who takes the blame and for what?
How they could miss the mark: Late filings, inaccurate paperwork, compliance issues, or unable to produce evidence of services rendered.
How to Use This Information
Review your service agreement. You’ll know whether an advisor is acting as a 3(21) nondiscretionary fiduciary or a 3(38) discretionary fiduciary by what is in the service agreement. (If you work with us, we offer both 3(21) and 3(38) fiduciary services, allowing clients to select the level of involvement that best suits their needs.) The type of role your advisor takes on will also determine the level of involvement and oversight you need to have.
Examples:
If you have a nondiscretionary investment advisor and they present several funds, don’t just tell them to pick one. You’re responsible for making that final decision. Your meeting minutes should convey how you made the decision.
Your investment advisor has outsourced the 3(38) responsibility to a third-party entity, and you’re still responsible for directing fund changes and approving replacements. That’s more like a screening service. It’s not tailored to your plan, requires you to do more work, and doesn’t take as much liability, so it should be quite cheap.
Document everything, or ensure your advisor is. Keep records of all communication, recommendations, and performance reports. This provides concrete evidence of their performance. Document the decision-making process as well, where applicable.
Ask tough questions. Don’t be afraid to challenge their recommendations and ask for detailed explanations.
Compare their services and fees. Are you getting value for your money? Don’t be afraid to benchmark the fee against similar advisors/plans. Increased responsibility often translates to higher fees. Handling complex plan designs or unique employee demographics can also drive up costs. Frequency of meetings and reporting could increase the advisor’s time commitment, and the size of your plan could increase the risk they are taking on. Fees are only an issue in the absence of value; a lower fee doesn’t necessarily mean better service.
Why This Matters to You
As an HR director or CFO, you understand the importance of mitigating risk and maximizing employee benefits. A subpar retirement plan advisor can expose your company to liability.
If you’re finding that your current advisor isn’t meeting standards, it’s time to explore other options. We understand the pressures you face, and we're committed to providing transparent, proactive, and reliable retirement plan services. Reach out to us and we’ll be happy to guide you through the retirement plan maze!