Each plan must have a named Fiduciary who is the “go to” person about Plan operation and administration. This person chooses and monitors other Plan Fiduciaries and service providers, and most prevalent in the news today the Investment Lineup. This person is the ERISA §402(a) fiduciary.
In the 401(K) world, there are four types of ERISA fiduciaries: §402(a), §3(16), §3(21), and §3(38). They are briefly described as: the Plan Fiduciary §402(a); the Plan Administrator §3(16); an Investment Advisor Fiduciary §3(21); and, an Investment Manager Fiduciary §3(38).
A Fiduciary owes the duties of good faith and trust and must act in the best interest of the Plan, while a Co-Fiduciary advises. Both must avoid conflicts of interest.
Today, lets focus on the §3(21) Fiduciary vs. §3(38) Fiduciary; To Keep It Simple, let’s pick the investment lineup as the only line of discussion.
§3(21) Investment Advisor = do it with me – Co-Fiduciary
§3(38) Investment Manager = do it for me. – Fiduciary
While that pesky little “Co” seems so meaningless, it’s the little things that count! As a §3(21) Co-Fiduciary, the Investment Advisor gives “advice” which needs to be in the best interest of the client. Whether to take the advice or not is ultimately the final decision of the Plan Fiduciary; therefore, conflicts of interest might arise surrounding such advice. Whereas an Investment Manager Fiduciary §3(38) must strive to avoid conflicts of interest.
Think of remodeling your Kitchen; You could DIY (You act as all the Fiduciaries). You could hire a designer (you are Plan Fiduciary, they are a Co-Fiduciary) or a Construction Manager (You pass off some fiduciary responsibilities and they become the Fiduciary).
So, DIY if you have full knowledge and a skillset for a successful remodel.
Use a designer to give you advice on what elements to buy (they may receive a commission from their advice), and if you follow their advice and personally build it correctly, you’ll have a fine product.
Or, take away the burden of construction and follow-up by hiring a Construction Manager. You thereby pass on the burden of the construction details, the construction itself, and planning for contingencies.
What is your Fiduciary situation? Is it optimized?