ERISA 3(38) investment manager, fiduciary warranty or broker
If you aren’t using an ERISA 3(38) investment manager you’re probably taking on risks where there is no reward. If you are like most plan sponsors you are taking on the risk of investment selection and monitoring in your 401(k) plan. Your plan may have been set up by enlisting the services of a broker or financial advisor. Most financial professionals don’t specialize in retirement plans governed by The Employee Retirement Income Security Act. If you or your employees aren’t paying a fee for service, you do not have an advisor that intends to accept any risk.
You may have called an 800 number and chosen to bypass the middleman. You may feel that you transferred your risk by working with a well-known investment or insurance company. They may have indicated they share in your fiduciary liability by provided a fiduciary warranty. Can you answer no to all of these risk questions?
- Does the broker for your plan also work for the investment provider?
- Does your plan provider also sell proprietary investments?
- If so, are the majority of the plan’s assets in proprietary investments?
- Does the proprietary investment provider provide investment reports based on proprietary analysis?
- If you have a warranty, has an ERISA attorney has an ERISA attorney reviewed it, to tell you what it actually covers?
Limit Your Risk with an ERISA 3(38) Investment Manager
An ERISA section 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 monitoring your plan provider (recordkeeper) and having to monitor and replace individual investments, you have narrowed down your monitoring responsibility to one entity. Most plan providers do not allow you to select any investment you want. Based on their business relationships, they narrow down your choices. Have you considered that these decisions may not be in your interest or your employees’?
Rather than have these concerns, you can hire a knowledgeable, fiduciary retirement plan consultant, an ERISA 3 (21) investment advisor, that shares in your fiduciary responsibility, to help you select and monitor the activities of your ERISA 3(38) investment manager. Your ERISA 3 (21) investment advisor can help you select an ERISA 3(38) investment manager.
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 ( section 3(38) of the Employee Retirement Income Security Act) -defined “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 fiduciary liability for the investment decisions made by the 3(38) Investment Manager, provided the appointment was prudent and you monitor their performance on an ongoing basis.
Get Help Monitoring Your ERISA 3(38) Investment Manager
You do retain a residual duty to monitor the 3(38) Investment Manager. This can be done by your ERISA 3 (21) investment advisor.
- Is this the first you have heard of an ERISA 3(38) investment manager?
- If you are using one, how many did you vet and what were the key factors in your selection?
- How do you monitor your investment manager?
We’d love to hear from you. Email your comments to james.brewer@lpl.com. Because of spam and financial industry regulation issues, I have disabled the comment section.
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