Many employers are not aware that CEOs, CFOs and Presidents have personal liability for the assets in the 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.
An employer can decide to “do it all themselves,” which means they select the investments and take all the risk. Alternatively, they can share partial risk, or none of the risk.
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. Or, the employer can transfer all the risk to the partner by utilizing the “3(38) Fiduciary” rules. However, only a Registered Investment Advisor like Wellspring Financial Partners 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).
Understanding the roles
A Plan advisor has different roles and responsibilities, and different levels of risk depending on the rule selected for the plan. The following table outlines the roles under the two rules.
Wellspring can accept full fiduciary responsibility — and the risk
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 Acknowledgement.
Using our “3(38) Fiduciary” Role to reduce your liability risk
When you choose to utilize a “3(38) Fiduciary” partner, there are two different ways the employer can delegate the liability to the investment management partner: 3(38) Platform level or 3(38) Plan Level.
- Plan Sponsors utilizing a 3(38) Platform still retain the ultimate fiduciary responsibility (and liability).
- If the relationship chosen by the Plan Sponsor is at the Plan Level, the investment manager takes on the entire responsibility for the plan, relieving the employer (Plan Sponsor) of liability to the employees.
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, and may incur higher trading costs and not be as diversified as is prudent for investors. Investments for plans managed by Wellspring include Dimensional Fund Advisor’s funds, which feature very broad market investments 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.
