The Do’s, Don’ts and Best Practices
for 3(16), 3(21) and 3(38) Fiduciaries
Marcia S. Wagner, Esq.
Introduction

Traditional Arrangement for Plans
◦ Plan sponsor has primary fiduciary responsibility
◦ Recordkeeper and TPA are non-fiduciary service
providers
◦ Financial advisor is broker (non-fiduciary)

Providers of Fiduciary Services
◦ TPAs may serve as 3(16) Fiduciaries
◦ Advisors may serve as 3(21) or 3(38) Fiduciaries
◦ Providers may strategically adjust service models
2
Employer’s Traditional Role
as Named Fiduciary

Definition of “Named Fiduciary”
◦ Named in plan document
◦ Employer traditionally serves in this role

Powers of Named Fiduciary
◦ Managing investment menu
◦ Administration of plan
◦ Engaging service providers
3
Employer’s Traditional Role
as 3(16) Fiduciary

Definition of 3(16) Fiduciary
◦ Also known as “Administrator” under ERISA
◦ Plan document must identify its 3(16) Fiduciary

Role of 3(16) Fiduciary
◦ Has ERISA reporting and disclosure duties
◦ Does not refer to traditional TPA firms providing nonfiduciary services
4
Engaging Fiduciary Service Providers

Selection of 3(16) Fiduciary
◦ Plan document may appoint TPA to serve as plan’s
Named Fiduciary and Administrator
◦ Service agreement would be required for TPA firm
◦ Employer may also serve as Named Fiduciary

Selection of 3(21) or 3(38) Fiduciary
◦ Named Fiduciary may appoint investment fiduciaries
5
Core Responsibilities of 3(16) Fiduciary

Disclosure Duties of Administrator
◦
◦
◦
◦

Provide SPDs
Provide benefit statements
Provide 404a-5 participant disclosures
Provide plan document (upon request)
Reporting Duties of Administrator
◦ Sign and file Form 5500
◦ Arrange for plan’s financial audit (as necessary)
6
3(16) Fiduciary’s Oversight Role

Oversight of Other Providers
◦ 3(16) Fiduciary may hire other providers to assist with
participant disclosures and Form 5500
◦ 3(16) Fiduciary remains responsible and must oversee
providers

Flexibility for TPA Firms
◦ TPA firm may provide all related services as 3(16)
Fiduciary, or hire and oversee other providers
7
Special Liability and Penalty Rules
for 3(16) Fiduciaries

No Delegation of Administrator’s Duties
◦ Administrator cannot delegate responsibility for its
reporting and disclosure obligations
◦ 3(16) Fiduciary subject to potential liability, even if
error caused by non-fiduciary service provider

Special Penalties
◦ Form 5500 Failure - $1,100 per day
◦ Disclosure Failure - $110 per day
8
Transferring Reporting and
Disclosure Duties to TPA

Plan Document Names TPA as Administrator
◦ TPA becomes responsible for participant disclosures
and Form 5500
◦ Employer would not have ultimate responsibility
◦ TPA potentially liable for penalties as Administrator
9
Core Duties of 3(21) Fiduciaries

Named Fiduciary May Appoint 3(21) Fiduciary
◦ Named Fiduciary has power to hire other fiduciaries
◦ Plan sponsor may hire financial advisor to provide
“investment advice” under ERISA Section 3(21)
◦ Advice needed for selection and monitoring of plan’s
menu options

Reliance on 3(21) Fiduciary’s Advice
◦ Named Fiduciary must not blindly follow advice
◦ Plan sponsor retains duty:
(1) To investigate qualifications
(2) To provide complete and accurate info
(3) To ensure reliance is reasonably justified
10
Overview of 3(38) Fiduciaries

Definition of “3(38) Fiduciary”
◦ Also known as “investment manager” under
ERISA Section 3(38)

Legal Requirements for 3(38) Fiduciary
◦ Must have discretionary authority
◦ Must be RIA, bank or insurance company
◦ Must acknowledge fiduciary status in writing
11
Core Duties of 3(38) Fiduciaries

Investment Control Over Plan Menu
◦ 3(38) Fiduciary must have authority to unilaterally add
or remove investment options
◦ Plan sponsor must give up control over menu

Liability Protection for Plan Sponsor
◦ Plan Sponsor is not responsible for individual acts of
3(38) Fiduciary
◦ Named Fiduciary merely responsible for prudently
selecting and monitoring 3(38) Fiduciary
12
3(38) Fiduciary vs. 3(21) Fiduciary

When Plan Sponsor Relies on 3(21) Fiduciary
◦ Both sponsor and 3(21) fiduciary are jointly
responsible for plan’s investment decisions
◦ Both can be held liable for imprudent decisions

When Plan Sponsor Relies on 3(38) Fiduciary
◦ No fiduciary liability for Plan Sponsor if it prudently
appoints 3(38) Fiduciary
13
Fiduciary Liability and Penalties

Civil Actions Under ERISA
◦ May be brought by DOL, participants or co-fiduciaries
◦ Fiduciary is personally liable for losses caused by
breach

DOL Civil Penalty
◦ Penalty amount is 20% of applicable recovery amount

Excise Taxes

Potential Co-Fiduciary Liability
14
Considerations for 3(16) Fiduciary
Service Models
15
Administrator vs. Named Fiduciary

Serving as Administrator and Named Fiduciary
◦ 3(16) Fiduciary may limit responsibility to
Administrator’s reporting and disclosure duties
◦ Many firms also assume discretionary authority over
management of plan as Named Fiduciary
◦ Scope of responsibility determined by service
agreement and plan document
16
Scope of 3(16) Fiduciary’s Services

Determining TPA’s Fiduciary Services
◦ May accept responsibility for 5500 reporting and
disclosures as plan’s Administrator
◦ May also accept comprehensive management
responsibilities as plan’s Named Fiduciary
◦ Illustration: TPA agrees to adjudicate benefit claims

Consider TPA’s Expertise and Procedures
◦ Prudent process must be established for each
fiduciary service
◦ Illustration: Benchmarking review conducted to
satisfy TPA’s duty to evaluate reasonableness of fees
17
TPAs and Bundled Providers

Ability of TPAs to Offer 3(16) Services
◦ TPAs are traditionally involved in plan administration
◦ Can modify non-fiduciary service model by adding
3(16) Fiduciary services

Bundled Providers
◦ Recordkeepers with TPA acting as its subcontractor
may offer 3(16) Fiduciary services
◦ TPA with recordkeeper acting as its subcontractor may
also offer 3(16) Fiduciary services
18
Oversight of Plan’s Recordkeeper

Importance of Recordkeeper’s Role
◦ Recordkeeper is typically responsible for generating
participant 404a-5 disclosures and statements
◦ Also provides website and system for processing
participant transactions
◦ 3(16) Fiduciary is responsible for disclosures and may
also be responsible for plan administration

When Plan Sponsor Hires Recordkeeper
◦ 3(16) Fiduciary should require use of approved
recordkeeper to ensure plan runs properly
19
3(16) Fiduciary’s
Non-Fiduciary Services

Types of Non-Fiduciary Services
◦ 3(16) Fiduciary may offer bundled recordkeeping and
TPA services
◦ May also offer TPA services only

When Offering TPA Services
◦ 3(16) Fiduciary must coordinate its TPA services with
recordkeeper’s administrative services
◦ Areas of potential overlap include preparation and
delivery of disclosures, loans and withdrawals
20
When 3(16) Fiduciary Hires
Non-Fiduciary Providers

Relationship with Other Service Providers
◦ 3(16) Fiduciary’s ERISA reporting duties include hiring
accounting firm for audit as necessary
◦ Additional duties may including hiring non-fiduciary
service providers (e.g., recordkeeper)

Accountability of 3(16) Fiduciary
◦ 3(16) Fiduciary has duty to prudently select and
monitor provider on ongoing basis
◦ Not accountable for individual errors of provider, but
responsible for prudent selection and monitoring
21
Responsibilities Retained
by Plan Sponsor

Coordination of Fiduciary Responsibilities
◦ Any responsibilities not accepted by 3(16) Fiduciary
remain with Plan Sponsor
◦ 3(16) Fiduciary’s agreement and plan document
should be reviewed to confirm responsibilities

Duties Relating to 3(16) Fiduciary
◦ Plan Sponsor is responsible for prudently selecting
and monitoring 3(16) Fiduciary
◦ DOL requires consideration of
(1) Qualifications of 3(16) Fiduciary
(2) Quality of services
(3) Reasonableness of fees
22
408(b)(2) Fee Disclosures

Fee Disclosure Requirements
◦ 3(16) Fiduciary must describe services and fees
◦ Must also identify any subcontractors and disclose
their compensation

When 3(16) Fiduciary Hires Recordkeeper
◦ Recordkeeper must provide 408(b)(2) fee
disclosures to 3(16) Fiduciary
◦ Plan Sponsor should consider requiring 3(16)
Fiduciary to disclose recordkeeper’s fees
◦ Should also confirm 3(16) Fiduciary is not hiring
affiliated recordkeeper or receiving “kickbacks”
23
Suggested Best Practices:
Scope of Fiduciary Services

Level of 3(16) Fiduciary Responsibility
◦ Offer fiduciary service only if prudent process can
be established and followed
◦ Document selection and monitoring criteria when
hiring other providers
◦ Prepare regular reports of other providers’ services

Advisability of Different Service Levels
◦ Simpler and easier to provide uniform level of
fiduciary oversight across all plan clients
24
Suggested Best Practices:
3(16) Contractual Considerations

Service Agreement for 3(16) Fiduciary
◦ Should state which responsibilities will shift to TPA
◦ Should confirm that Plan Sponsor remains
responsible for hiring 3(16) Fiduciary
◦ Plan Sponsor should remain responsible for
providing complete and accurate information

Coordination with Plan Document
◦ Confirm Administrator and Named Fiduciary
provisions are consistent with agreement
◦ Plan document may provide that both TPA and Plan
Sponsor will serve as Named Fiduciaries
25
Suggested Best Practices:
Monitoring Support for Plan Sponsor

Employer’s Duty to Monitor 3(16) Fiduciary
◦ Must monitor 3(16) Fiduciary’s performance at
reasonable intervals
◦ Plan Sponsor should ask for regular updates

Illustration
◦ 3(16) Fiduciary provides updates on annual basis
◦ Updates include summary information of:
(1) number of benefit claims adjudicated
(2) exception reports identifying potential issues
(3) performance assessment of other providers
(4) benchmarking analysis
26
Considerations for 3(21) and 3(38)
Fiduciary Service Models
27
Fiduciary Service Models for
Financial Advisors

Legal Requirements for Fiduciary Advisors
◦ ERISA requires advisor to receive levelized
compensation to serve as plan fiduciary
◦ Advisers Act requires registration as RIA before
offering advice for level, fee-based compensation

Spectrum of Possible Service Models
◦ Helpful to focus on 3 basic approaches:
- Core 3(21) Fiduciary
- Hybrid 3(38) Fiduciary
- Full 3(38) Fiduciary
28
Core 3(21) Fiduciary Service Model

Core Service Provided by 3(21) Fiduciary
◦ Assisting Plan Sponsor in selection and monitoring of
Plan’s investment menu options
◦ Advice is non-discretionary (i.e., recommendations)

Related Services
◦ Assisting with IPS document where Plan Sponsor is
responsible for reviewing and adopting IPS
◦ Providing quarterly reports and meeting with Plan
Sponsor annually
◦ May also offer non-fiduciary services
29
Full 3(38) Fiduciary Service Model

Full Investment Control by 3(38) Fiduciary
◦ 3(38) Fiduciary has authority to unilaterally change
plan’s investment menu
◦ Also has authority to make unilateral changes to IPS
◦ Provides quarterly reports to Plan Sponsor, but only
meets as needed
◦ May also offer non-fiduciary services

Liability Protection for Plan Sponsor
◦ Plan Sponsor only remains responsible for prudently
appointing and monitoring 3(38) Fiduciary
◦ Service model preferred by Plan Sponsors that want
minimal involvement in plan investments
30
Hybrid 3(38) Fiduciary Service Model

Advantages of Hybrid Model
◦ Plan Sponsor is insulated from liability for mistakes
concerning plan’s investment menu
◦ Also retains indirect control over investment menu
◦ 3(38) Fiduciary has discretion over menu but
discusses proposed changes with Plan Sponsor

Plan Sponsor’s Authority
◦ Plan Sponsor may terminate 3(38) Fiduciary before
any proposed change is implemented
◦ Control over IPS gives Plan Sponsor ability to impose
specific investment guidelines on 3(38) Fiduciary
31
Considerations for
Determining Service Model

Advisability of Different Service Choices
◦ Advisor may choose to offer Core 3(21) services only
◦ May also offer plan clients choice of 3(21) or 3(38)
services
◦ Offering different choices may allow advisor to serve
greater range of plan clients

Comparing Fiduciary Service Models
◦ Same level of accountability for any bad advice
(discretionary or non-discretionary) under ERISA
◦ Hybrid 3(38) model requires more coordination with
Plan Sponsor and less scalable than Full 3(38) model
32
Services for Participants

Non-Fiduciary Investment Education
◦ Asset allocation models that use plan’s investment
options may be provided if disclaimers are included

Non-Discretionary Investment Advice
◦ Individualized advice should be provided on one-onone basis and written records should be maintained

Discretionary Investment Advice
◦ Advice may be provided in form of risk-based model
portfolios
◦ Model portfolios may also be used as plan’s QDIA
33
Fiduciary Benefits of 404(c) Compliance

Liability Protection Under ERISA 404(c)
◦ Plan fiduciaries are not liable for losses resulting
from participant’s investment control
◦ Participants must have “opportunity to exercise
control” for 404(c) purposes
◦ Plan menu must have broad range of investment
alternatives

Ensuring 404(c) Compliance
◦ Advisor can ensure plan menu requirement is met,
but not other 404(c) requirements
◦ Ask Plan Sponsor to represent that other 404(c)
requirements will be met in agreement with advisor
34
Suggested Best Practices:
Contractual Considerations

Investment Menu Responsibilities
◦ Should define scope of advisor’s fiduciary services
◦ Should specify investment areas in which advisor
will not be responsible (e.g., employer stock)

Other Responsibilities
◦ For any non-fiduciary services, agreement should
clarify advisor will not be acting as plan officer
◦ Should also clarify if participants will be receiving
education or advice from advisor
35
Suggested Best Practices:
Recordkeeper Considerations

Recordkeeper’s Impact on Investment Costs
◦ Recordkeeping platform determines universe of
available investment funds and their share classes
◦ Different share classes have varying expenses
(e.g., 12b-1 fee, shareholder service fee)
◦ Should clarify that advisor will not be responsible for
share class determined by recordkeeper’s program

Recordkeeper’s Mandatory Funds
◦ Recordkeeper may require use of certain funds
(e.g., proprietary TDF)
◦ Should clarify advisor will not monitor such funds
36
Suggested Best Practices:
Special 3(38) Considerations

General 3(38) Considerations
◦ Plan should transition to recordkeeper capable of
supporting advisor, including model portfolios
◦ Recordkeeper may require authorization letter or
side agreement with Plan Sponsor

Hybrid 3(38) Considerations
◦ Advisor should provide notice of proposed menu
changes except in extraordinary circumstances
◦ Fiduciary must have power to take any necessary
action in accordance with ERISA
37
Conclusions

No “One Size Fits All” Model for Providers
◦ TPAs have flexibility in accepting Named Fiduciary
duties in addition to duties as plan’s Administrator
◦ Financial advisors can serve as Core 3(21), Hybrid
3(38) of Full 3(38) Fiduciaries

Consulting with ERISA Counsel
◦ Providers should consult ERISA counsel before
implementing any service model changes
◦ Plan sponsors should consult ERISA counsel to ensure
fiduciary responsibilities are allocated properly
38
Important Information
This presentation is intended for sponsors of 401(k) plans
and other types of defined contribution retirement plans
with participant-directed investments that are subject to the
Employee Retirement Income Security Act of 1974, as
amended (ERISA), as well as the service providers that work
with such plans.
This information is intended for general informational
purposes only, and it does not constitute legal, tax or
investment advice on the part of The Wagner Law Group or
its affiliates.
39
The Do’s, Don’ts and Best Practices
for 3(16), 3(21) and 3(38) Fiduciaries
Marcia S. Wagner, Esq.
q.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
marcia@wagnerlawgroup.com
A0115595