The Do

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The Dos, Donts and Best Practices for 3(16),
3(21) and 3(38) Fiduciaries
Marcia S. Wagner, Esq.
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Introduction

• Traditional Arrangement for Plans
• Plan sponsor has primary fiduciary responsibility
• Recordkeeper and TPA are non-fiduciary service
  providers
• Financial advisor is broker (non-fiduciary)
• Providers of Fiduciary Services
• TPAs may serve as 3(16) Fiduciaries
• Advisors may serve as 3(21) or 3(38) Fiduciaries
• Providers may strategically adjust service models

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Employers Traditional Roleas Named Fiduciary

• Definition of Named Fiduciary
• Named in plan document
• Employer traditionally serves in this role
• Powers of Named Fiduciary
• Managing investment menu
• Administration of plan
• Engaging service providers

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Employers Traditional Roleas 3(16) Fiduciary

• Definition of 3(16) Fiduciary
• Also known as Administrator under ERISA
• Plan document must identify its 3(16) Fiduciary
• Role of 3(16) Fiduciary
• Has ERISA reporting and disclosure duties
• Does not refer to traditional TPA firms providing
  non-fiduciary services

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Engaging Fiduciary Service Providers

• Selection of 3(16) Fiduciary
• Plan document may appoint TPA to serve as plans
  Named Fiduciary and Administrator
• Service agreement would be required for TPA firm
• Employer may also serve as Named Fiduciary
• Selection of 3(21) or 3(38) Fiduciary
• Named Fiduciary may appoint investment fiduciaries

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Core Responsibilities of 3(16) Fiduciary

• Disclosure Duties of Administrator
• Provide SPDs
• Provide benefit statements
• Provide 404a-5 participant disclosures
• Provide plan document (upon request)
• Reporting Duties of Administrator
• Sign and file Form 5500
• Arrange for plans financial audit (as necessary)

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3(16) Fiduciarys Oversight Role

• Oversight of Other Providers
• 3(16) Fiduciary may hire other providers to
  assist with participant disclosures and Form 5500
• 3(16) Fiduciary remains responsible and must
  oversee providers
• Flexibility for TPA Firms
• TPA firm may provide all related services as
  3(16) Fiduciary, or hire and oversee other
  providers

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Special Liability and Penalty Rules for 3(16)
Fiduciaries

• No Delegation of Administrators Duties
• Administrator cannot delegate responsibility for
  its reporting and disclosure obligations
• 3(16) Fiduciary subject to potential liability,
  even if error caused by non-fiduciary service
  provider
• Special Penalties
• Form 5500 Failure - 1,100 per day
• Disclosure Failure - 110 per day

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Transferring Reporting and Disclosure Duties to
TPA

• Plan Document Names TPA as Administrator
• TPA becomes responsible for participant
  disclosures and Form 5500
• Employer would not have ultimate responsibility
• TPA potentially liable for penalties as
  Administrator

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Core Duties of 3(21) Fiduciaries

• Named Fiduciary May Appoint 3(21) Fiduciary
• Named Fiduciary has power to hire other
  fiduciaries
• Plan sponsor may hire financial advisor to
  provide investment advice under ERISA Section
  3(21)
• Advice needed for selection and monitoring of
  plans menu options
• Reliance on 3(21) Fiduciarys Advice
• Named Fiduciary must not blindly follow advice
• Plan sponsor retains duty
• (1) To investigate qualifications
• (2) To provide complete and accurate info
• (3) To ensure reliance is reasonably justified

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Overview of 3(38) Fiduciaries

• Definition of 3(38) Fiduciary
• Also known as investment manager under
  ERISA Section 3(38)
• Legal Requirements for 3(38) Fiduciary
• Must have discretionary authority
• Must be RIA, bank or insurance company
• Must acknowledge fiduciary status in writing

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Core Duties of 3(38) Fiduciaries

• Investment Control Over Plan Menu
• 3(38) Fiduciary must have authority to
  unilaterally add or remove investment options
• Plan sponsor must give up control over menu
• Liability Protection for Plan Sponsor
• Plan Sponsor is not responsible for individual
  acts of 3(38) Fiduciary
• Named Fiduciary merely responsible for prudently
  selecting and monitoring 3(38) Fiduciary

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3(38) Fiduciary vs. 3(21) Fiduciary

• When Plan Sponsor Relies on 3(21) Fiduciary
• Both sponsor and 3(21) fiduciary are jointly
  responsible for plans investment decisions
• Both can be held liable for imprudent decisions
• When Plan Sponsor Relies on 3(38) Fiduciary
• No fiduciary liability for Plan Sponsor if it
  prudently appoints 3(38) Fiduciary

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Fiduciary Liability and Penalties

• Civil Actions Under ERISA
• May be brought by DOL, participants or
  co-fiduciaries
• Fiduciary is personally liable for losses caused
  by breach
• DOL Civil Penalty
• Penalty amount is 20 of applicable recovery
  amount
• Excise Taxes
• Potential Co-Fiduciary Liability

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Considerations for 3(16) Fiduciary Service Models
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Administrator vs. Named Fiduciary

• Serving as Administrator and Named Fiduciary
• 3(16) Fiduciary may limit responsibility to
  Administrators reporting and disclosure duties
• Many firms also assume discretionary authority
  over management of plan as Named Fiduciary
• Scope of responsibility determined by service
  agreement and plan document

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Scope of 3(16) Fiduciarys Services

• Determining TPAs Fiduciary Services
• May accept responsibility for 5500 reporting and
  disclosures as plans Administrator
• May also accept comprehensive management
  responsibilities as plans Named Fiduciary
• Illustration TPA agrees to adjudicate benefit
  claims
• Consider TPAs Expertise and Procedures
• Prudent process must be established for each
  fiduciary service
• Illustration Benchmarking review conducted to
  satisfy TPAs duty to evaluate reasonableness of
  fees

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TPAs and Bundled Providers

• Ability of TPAs to Offer 3(16) Services
• TPAs are traditionally involved in plan
  administration
• Can modify non-fiduciary service model by adding
  3(16) Fiduciary services
• Bundled Providers
• Recordkeepers with TPA acting as its
  subcontractor may offer 3(16) Fiduciary services
• TPA with recordkeeper acting as its subcontractor
  may also offer 3(16) Fiduciary services

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Oversight of Plans Recordkeeper

• Importance of Recordkeepers Role
• Recordkeeper is typically responsible for
  generating participant 404a-5 disclosures and
  statements
• Also provides website and system for processing
  participant transactions
• 3(16) Fiduciary is responsible for disclosures
  and may also be responsible for plan
  administration
• When Plan Sponsor Hires Recordkeeper
• 3(16) Fiduciary should require use of approved
  recordkeeper to ensure plan runs properly

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3(16) Fiduciarys Non-Fiduciary Services

• Types of Non-Fiduciary Services
• 3(16) Fiduciary may offer bundled recordkeeping
  and TPA services
• May also offer TPA services only
• When Offering TPA Services
• 3(16) Fiduciary must coordinate its TPA services
  with recordkeepers administrative services
• Areas of potential overlap include preparation
  and delivery of disclosures, loans and
  withdrawals

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When 3(16) Fiduciary Hires Non-Fiduciary
Providers

• Relationship with Other Service Providers
• 3(16) Fiduciarys ERISA reporting duties include
  hiring accounting firm for audit as necessary
• Additional duties may including hiring
  non-fiduciary service providers (e.g.,
  recordkeeper)
• Accountability of 3(16) Fiduciary
• 3(16) Fiduciary has duty to prudently select and
  monitor provider on ongoing basis
• Not accountable for individual errors of
  provider, but responsible for prudent selection
  and monitoring

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Responsibilities Retained by Plan Sponsor

• Coordination of Fiduciary Responsibilities
• Any responsibilities not accepted by 3(16)
  Fiduciary remain with Plan Sponsor
• 3(16) Fiduciarys agreement and plan document
  should be reviewed to confirm responsibilities
• Duties Relating to 3(16) Fiduciary
• Plan Sponsor is responsible for prudently
  selecting and monitoring 3(16) Fiduciary
• DOL requires consideration of
• (1) Qualifications of 3(16) Fiduciary
• (2) Quality of services
• (3) Reasonableness of fees

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408(b)(2) Fee Disclosures

• Fee Disclosure Requirements
• 3(16) Fiduciary must describe services and fees
• Must also identify any subcontractors and
  disclose their compensation
• When 3(16) Fiduciary Hires Recordkeeper
• Recordkeeper must provide 408(b)(2) fee
  disclosures to 3(16) Fiduciary
• Plan Sponsor should consider requiring 3(16)
  Fiduciary to disclose recordkeepers fees
• Should also confirm 3(16) Fiduciary is not hiring
  affiliated recordkeeper or receiving kickbacks

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Suggested Best PracticesScope of Fiduciary
Services

• Level of 3(16) Fiduciary Responsibility
• Offer fiduciary service only if prudent process
  can be established and followed
• Document selection and monitoring criteria when
  hiring other providers
• Prepare regular reports of other providers
  services
• Advisability of Different Service Levels
• Simpler and easier to provide uniform level of
  fiduciary oversight across all plan clients

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Suggested Best Practices3(16) Contractual
Considerations

• Service Agreement for 3(16) Fiduciary
• Should state which responsibilities will shift to
  TPA
• Should confirm that Plan Sponsor remains
  responsible for hiring 3(16) Fiduciary
• Plan Sponsor should remain responsible for
  providing complete and accurate information
• Coordination with Plan Document
• Confirm Administrator and Named Fiduciary
  provisions are consistent with agreement
• Plan document may provide that both TPA and Plan
  Sponsor will serve as Named Fiduciaries

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Suggested Best PracticesMonitoring Support for
Plan Sponsor

• Employers Duty to Monitor 3(16) Fiduciary
• Must monitor 3(16) Fiduciarys performance at
  reasonable intervals
• Plan Sponsor should ask for regular updates
• Illustration
• 3(16) Fiduciary provides updates on annual basis
• Updates include summary information of
• (1) number of benefit claims adjudicated
• (2) exception reports identifying potential
  issues
• (3) performance assessment of other providers
• (4) benchmarking analysis

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Considerations for 3(21) and 3(38) Fiduciary
Service Models
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Fiduciary Service Models for Financial Advisors

• Legal Requirements for Fiduciary Advisors
• ERISA requires advisor to receive levelized
  compensation to serve as plan fiduciary
• Advisers Act requires registration as RIA before
  offering advice for level, fee-based compensation
• Spectrum of Possible Service Models
• Helpful to focus on 3 basic approaches
• - Core 3(21) Fiduciary
• - Hybrid 3(38) Fiduciary
• - Full 3(38) Fiduciary

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Core 3(21) Fiduciary Service Model

• Core Service Provided by 3(21) Fiduciary
• Assisting Plan Sponsor in selection and
  monitoring of Plans investment menu options
• Advice is non-discretionary (i.e.,
  recommendations)
• Related Services
• Assisting with IPS document where Plan Sponsor is
  responsible for reviewing and adopting IPS
• Providing quarterly reports and meeting with Plan
  Sponsor annually
• May also offer non-fiduciary services

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Full 3(38) Fiduciary Service Model

• Full Investment Control by 3(38) Fiduciary
• 3(38) Fiduciary has authority to unilaterally
  change plans investment menu
• Also has authority to make unilateral changes to
  IPS
• Provides quarterly reports to Plan Sponsor, but
  only meets as needed
• May also offer non-fiduciary services
• Liability Protection for Plan Sponsor
• Plan Sponsor only remains responsible for
  prudently appointing and monitoring 3(38)
  Fiduciary
• Service model preferred by Plan Sponsors that
  want minimal involvement in plan investments

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Hybrid 3(38) Fiduciary Service Model

• Advantages of Hybrid Model
• Plan Sponsor is insulated from liability for
  mistakes concerning plans investment menu
• Also retains indirect control over investment
  menu
• 3(38) Fiduciary has discretion over menu but
  discusses proposed changes with Plan Sponsor
• Plan Sponsors Authority
• Plan Sponsor may terminate 3(38) Fiduciary before
  any proposed change is implemented
• Control over IPS gives Plan Sponsor ability to
  impose specific investment guidelines on 3(38)
  Fiduciary

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Considerations for Determining Service Model

• Advisability of Different Service Choices
• Advisor may choose to offer Core 3(21) services
  only
• May also offer plan clients choice of 3(21) or
  3(38) services
• Offering different choices may allow advisor to
  serve greater range of plan clients
• Comparing Fiduciary Service Models
• Same level of accountability for any bad advice
  (discretionary or non-discretionary) under ERISA
• Hybrid 3(38) model requires more coordination
  with Plan Sponsor and less scalable than Full
  3(38) model

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Services for Participants

• Non-Fiduciary Investment Education
• Asset allocation models that use plans
  investment options may be provided if disclaimers
  are included
• Non-Discretionary Investment Advice
• Individualized advice should be provided on
  one-on-one basis and written records should be
  maintained
• Discretionary Investment Advice
• Advice may be provided in form of risk-based
  model portfolios
• Model portfolios may also be used as plans QDIA

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Fiduciary Benefits of 404(c) Compliance

• Liability Protection Under ERISA 404(c)
• Plan fiduciaries are not liable for losses
  resulting from participants investment control
• Participants must have opportunity to exercise
  control for 404(c) purposes
• Plan menu must have broad range of investment
  alternatives
• Ensuring 404(c) Compliance
• Advisor can ensure plan menu requirement is met,
  but not other 404(c) requirements
• Ask Plan Sponsor to represent that other 404(c)
  requirements will be met in agreement with advisor

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Suggested Best PracticesContractual
Considerations

• Investment Menu Responsibilities
• Should define scope of advisors fiduciary
  services
• Should specify investment areas in which advisor
  will not be responsible (e.g., employer stock)
• Other Responsibilities
• For any non-fiduciary services, agreement should
  clarify advisor will not be acting as plan
  officer
• Should also clarify if participants will be
  receiving education or advice from advisor

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Suggested Best PracticesRecordkeeper
Considerations

• Recordkeepers Impact on Investment Costs
• Recordkeeping platform determines universe of
  available investment funds and their share
  classes
• Different share classes have varying expenses
  (e.g., 12b-1 fee, shareholder service fee)
• Should clarify that advisor will not be
  responsible for share class determined by
  recordkeepers program
• Recordkeepers Mandatory Funds
• Recordkeeper may require use of certain funds
  (e.g., proprietary TDF)
• Should clarify advisor will not monitor such funds

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Suggested Best PracticesSpecial 3(38)
Considerations

• General 3(38) Considerations
• Plan should transition to recordkeeper capable of
  supporting advisor, including model portfolios
• Recordkeeper may require authorization letter or
  side agreement with Plan Sponsor
• Hybrid 3(38) Considerations
• Advisor should provide notice of proposed menu
  changes except in extraordinary circumstances
• Fiduciary must have power to take any necessary
  action in accordance with ERISA

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Conclusions

• No One Size Fits All Model for Providers
• TPAs have flexibility in accepting Named
  Fiduciary duties in addition to duties as plans
  Administrator
• Financial advisors can serve as Core 3(21),
  Hybrid 3(38) of Full 3(38) Fiduciaries
• Consulting with ERISA Counsel
• Providers should consult ERISA counsel before
  implementing any service model changes
• Plan sponsors should consult ERISA counsel to
  ensure fiduciary responsibilities are allocated
  properly

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Important Information

• This presentation is intended for sponsors of
  401(k) plans and other types of defined
  contribution retirement plans with
  participant-directed investments that are subject
  to the Employee Retirement Income Security Act of
  1974, as amended (ERISA), as well as the service
  providers that work with such plans.
• This information is intended for general
  informational purposes only, and it does not
  constitute legal, tax or investment advice on the
  part of The Wagner Law Group or its affiliates.

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The Dos, Donts and Best Practices for
3(16), 3(21) and 3(38) Fiduciaries

• Marcia S. Wagner, Esq.
• q.
• 99 Summer Street, 13th Floor
• Boston, MA 02110
• Tel [phone] Fax [phone]
• Website www.wagnerlawgroup.com
• marcia_at_wagnerlawgroup.com
• A0115595