IFA's Fiduciary Commitment

In ERISA retirement plans, decisions made on behalf of the plan participants must be made solely in their best interest. Those who hold the discretion to make these decisions are known as fiduciaries and carry liability for those decisions. Based on ERISA Law, discretion for retirement plan decisions ultimately rests with the plan sponsors, making them vulnerable to participant claims and lawsuits.

While some of this liability is unavoidable, plan sponsors have the ability to transfer some liability to a third party who will accept in writing the fiduciary liability for the selection, monitoring, and replacement of retirement plan investment options. This is known as an ERISA 3(38) fiduciary, and Index Funds Advisors, Inc. is a 3(38) fiduciary, effectively relieving the plan trustees’ liability with respect to these issues. The plan sponsor may wish to inquire if the current financial advisor to the plan has accepted this particular level of fiduciary liability.

Fiduciary obligations of plan sponsors:

A fiduciary is an individual, corporation or association with the legal authority and duty to make decisions regarding financial matters on behalf of another party.

The term “plan sponsor” describes fiduciaries. Because plan sponsors make decisions on behalf of the participants, they are accountable for the process they use to make those decisions. When the plan sponsor is accountable, he is also liable.

Responsibilities of a Plan Sponsor per ERISA section 404(a):

  • i. Ensure compliance with the great sole interest and exclusive purpose rules
  • ii. Ensure compliance with the Prudent Man Rule
  • iii. Expend only reasonable costs
  • iv. Diversify risks
  • v. Follow plan documents
  • vi. Avoid prohibited transactions
  • vii. While plan fiduciaries are legally immune to the consequences of poor investment decisions by plan participants, fiduciaries still remain responsible for selecting and monitoring the specific investment options offered to participants in the plan.

Delegation of the fiduciary responsibility:

Fiduciaries of qualified retirement plans can delegate their day-to-day investment fiduciary responsibilities and liabilities to others. This has been allowed by the Employee Retirement Income Security Act (ERISA) since its inception in 1974.

ERISA allows plan sponsors to transfer certain fiduciary liability in their plans. Sponsors may appoint a fiduciary to implement the dictates of a strict fiduciary service model. ERISA does not allow a plan sponsor to delegate the fiduciary responsibility of selecting the named fiduciary. However, they may delegate the discretion to select, monitor, and replace investments in their plan. If a plan sponsor delegates the discretion, they no longer have discretion. Without discretion they are no longer liable for the choices.

Benefits of 3(38) fiduciary delegation:

The term “3(38)” comes directly from ERISA. Under section 3(38) of ERISA, a plan sponsor can delegate their duty to select, monitor, and (as required) replace investment options in their plan.

The ability to legally delegate certain fiduciary duties may provide significant relief to plan sponsors.