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
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.