Does your investment guide give you a false sense of security?
It doesn’t seem to be wise to take on risks where there is no reward. Yet, if you are like most plan sponsors you are taking on the risk of investment selection and monitoring in your 401(k) plan. If you don’t have the time or knowledge to understand sharp ratio, revenue-sharing, passive and active investment strategies you may have hired a firm are several firms to do it for you. You may say that you transferred your risk by selecting a well-known investment or insurance company. Moreover, they may have told you that you have some kind of fiduciary warranty. Can you answer no to all of these risk questions?
- Does your plan provider also sell investments?
- If so, are they your default investment choice or represent the majority of investment choices?
- Does the broker for your plan also work for the investment provider?
- Do they provide you quarterly reports based on their proprietary analysis?
If not you are at a higher risk than those who could answer no to all.
Limit your risk with an ERISA 3(38) investment manager
An ERISA 3(38) investment manager allows you to delegate your responsibilities and personal liabilities to a firm that takes on the liability. Rather than be responsible for the entirety of your investment menu you have narrowed down your monitoring responsibility to one entity. You can hire a qualified investment advisor, that accepts fiduciary responsibility, to help you monitor the activities of your ERISA 3(38) investment manager.
Recent trends in regulatory enforcement and ERISA litigation are leading plan sponsors to examine ways to shift or “outsource” fiduciary risk. The market losses of 2008 have served to underscore this risk, particularly as it relates to investment-related losses in participant accounts. As a result, increasing numbers of sophisticated plan sponsors are asking their advisors to serve as an ERISA 3(38) investment manager and/or conducting searches for those who do. A number of prominent ERISA attorneys attest to the validity of retaining an ERISA 3(38) investment manager. These attorneys include James Baker of Winston and Strawn and Jason Roberts, of the Pension Resource Institute.
My buddy W. Scott Simon, JD, AIFA, has written extensively on the topic. He is the author of “The Prudent Investor Act: A Guide to Understanding,” and writes a monthly “Fiduciary Focus” column for Morningstar. An ERISA 3(38) investment manager accepts appointment from a plan sponsor as the plan fiduciary with sole responsibility (and liability) for selecting, monitoring and replacing the investment options offered in a qualified retirement plan. Once this is done properly via a contract, you no longer have any responsibility or liability for any investment mistakes that may be made by the ERISA 3(38) investment manager. Your do retain a residual duty to monitor the ERISA 3(38) investment manager.
Please email us if you are interested in being invited to one of our presentations on managing your risk.
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