Mitigate Employer Liability with a 3(38) Fiduciary
Mitigate Employer Liability with a 3(38) Fiduciary
Many employers are not aware that CEOs, CFOs, and Presidents have personal liability for the assets in their company’s retirement plan. This means that employees, past and present, can sue the business owner for the performance of the plan and its assets. For that reason, it is crucial that the employer understands this risk and manages exposure to it.
How Much Risk Can You Afford?
A retirement plan can be built using a rule called “3(21) Fiduciary,” which defines the plan as sharing the risk with a partner investment company. Alternatively, the employer can transfer all the risk to the partner by utilizing the “3(38) Fiduciary” rule. However, an RIA like Wellspring Financial Partners, a bank, or an insurance company can be a 3(38) Fiduciary for you.
No matter which rule you choose, it is important to remember that the Plan Sponsor always retains a duty to prudently select the Investment Advisor/Manager and make sure it is carrying out its appointed duties (3(21) and 3(38) respectively).
Low
High
3(38) Investment
Manager
3(21) Co-Fidicuary
Assistance
Sole Responsibility
Low Risk
3(38) Investment
3(21) Co-Fidicuary Assistance
High Risk
Sole Responsibility
Understanding the Roles
The roles under the two rules are as follows:
3(21) Fiduciary
Recommending investments to the plan sponsor
Monitoring those investments and suggesting replacements as appropriate
Advising the plan sponsor in following a fiduciary process, including the Investment Policy Statement
3(38) Fiduciary
Solely responsible for the selection, monitoring, and replacement of plan investment options
Minimizing the responsibility of plan sponsor and other plan fiduciaries for the investment manager's decisions
Acknowledging the fiduciary agreement between the plan sponsor and investment manager in writing
We Can Accept Full Fiduciary Responsibility
If our full-index or passive investment menu is utilized in your plan as encouraged by the “Prudent Man Rule (3rd Restatement),” Wellspring will accept full 3(38) 405(d)(i) Independent Fiduciary Acknowledgment.
Reducing Your Liability Risk
3(38) - Platform Level
The 3(38) Platform will pre-screen and assess the investment universe to narrow the prudent investment options available. The selection of investments is the responsibility of the plan sponsor.
3(38) Platforms will not determine a sufficient number or style of investment options to permit participants to create a diversified portfolio. That is up to the plan sponsor.
Most 3(38) Platforms assert in their agreements that the plan sponsor retains the ultimate fiduciary responsibility to determine the plan’s investment menu and adherence to compliance.
3(38) - Plan Level
With a 3(38) Plan Level design, your business passes responsibility (and liability) to the fiduciary plan advisor. The investment manager becomes solely responsible for selecting investment options, monitoring the plan, and ensuring compliance.
“The real value in retaining an Investment Manager pursuant to ERISA section 3(38) lies in having a truly independent firm make the same types of decisions that a well-informed plan sponsor would. That kind of 3(38) would, among other things, have unfettered access to all investment options and be free from the constraining outside influences to select whatever options it deemed prudent.”
– Scott Simon, Attorney, “Principal of Prudent Investors” Morningstar’s Fiduciary Focus
How We Invest as a 3(38) Plan Fiduciary
Wellspring Financial Partners believes in smart, passive investing. While pure index fund investing is passive, it does not always achieve the best returns, may incur higher trading costs, and might not be as diversified as is prudent for investors. Investments for plans managed by Wellspring include Dimensional Fund Advisor (DFA) funds, which feature very broad market investments that are smartly and passively managed.
“The greater the trustee’s departure from one of the valid passive strategies, the greater it’s likely to be the burden of justification [for selecting an active investment strategy] and also of continuous monitoring [of it].” – Reporter’s General Note on Section 227 of the Restatement 3rd of Trusts (Prudent Investor Rule), comments e through h, page 79.
