In the 401(k) arena, the ability to ensure compliance with the Department of Labor fiduciary rule is essential and complicated.

The rule takes effect next April, so the timeline to learn and adjust is short. Advisers who market to plan sponsors or who would like to market to this segment can do a better job by sharing several key messages with plan sponsors:

  1. It is true; you are a fiduciary. This goes for the plan sponsor as well as the adviser. Both must make prudent decisions, with plan participants’ best interests taking priority over their own.
  2. You must understand all your plan fees and be able to explain why they are reasonable. Not doing so leaves you vulnerable to lawsuits by plan participants, as we have seen recently in the case of such well-known companies as American Century Funds, Delta Air Lines and Fujitsu.
  3. You must ask the right questions of your current provider and regularly benchmark your plan against others of similar size and complexity. In recent years, plan costs have come down and services have expanded. Even if you got a great deal for your plan when it started, it may not be so great any longer. Check.
  4. You should maintain your Investment Policy Statement. It is easy to let a plan drift away from its stated goals if you don’t review and maintain your policy statement regularly.
  5. You should form an investment committee and meet regularly. Even the best plan and investment advisers must be supervised. This is part of the plan sponsor’s job.
  6. You are required to monitor your plan.
  7. You can delegate your fiduciary responsibility to an outside service provider.

Number seven is key.

Plan sponsors can outsource most but not all of their fiduciary responsibility under the Employee Retirement Income Security Act of 1974 3(38) Safe Harbor rule. This limits a plan sponsor’s fiduciary liability when the sponsor appoints a qualified investment manager.

A plan sponsor who completely delegates this responsibility will no longer be under any obligation to invest or manage assets of the plan that the investment manager is responsible for investing, representing the highest level of investment liability transfer possible under ERISA.

But not all 3(38) investment managers are created equal. Some are limited to a preselected menu of funds, those being promoted by a record keeper or those that come without an additional fee, so long as the plan invests a portion of its assets in the investment manager’s own managed accounts.

The greatest value in retaining a 3(38) investment manager lies in having a truly independent firm sit on the plan sponsor’s side of the table and make the investment decisions that a well-informed plan sponsor would make, with a free hand.

It is also possible for a plan sponsor to outsource its responsibility for plan administration. Retirement plan administration is increasingly involved and complex.

For many plan sponsors, the level of education and the commitment of time and energy required to adequately fulfill these responsibilities is an unwelcome administrative burden. When coupled with the significant risk of fiduciary liability, plan sponsors are increasingly seeking relief available through a proper delegation to an independent fiduciary in accordance with ERISA Section 3(16).

Investment Policy Statements
Although outsourcing to a responsible 3(38) provider is an excellent start, advisers should be sure that their plan sponsor clients have a formal investment policy statement. This statement has four basic purposes: to set realistic objectives; to define the asset allocation policy; to establish management procedures; and to determine communication procedures.

Without an IPS, it is virtually impossible for a plan sponsor to ensure procedural prudence for the selection and monitoring of investments. Advisers who are armed with the ability to provide 3(38) service and who incorporate the IPS as part of their standard procedure when working with plan sponsors are in the best position to build a successful plan business that can prevail now and in the coming DoL-shaped environment.

This story is part of a 30-30 series on ways to upgrade your practice.

Mark Klein

Mark Klein

Mark Klein is founder and chief executive of PCS, a CEFEX certified record keeper in Philadelphia.