While fiduciary as a term is front and center with 401k advisors, how well do they really understand its inner workings? One ERISA expert recounts a time not long ago when advisors asked him to explain “3(28) and 3(31).”
While recognition and comprehension have thankfully moved forward since then, too many plan sponsors (and their advisors) fundamentally misunderstand what, exactly, the so-called 3s—3(38), 3(21), 3(16)—do and mean.
Dan Notto, ERISA Strategist, Retirement Solutions with J.P. Morgan Asset Management is here to help, and notes that while the level of understanding varies by advisor, “those that have the majority of their practice in 401ks really seem to understand fiduciary issues. In fact, they tend to count their understanding of fiduciary issues as an added value when they’re dealing with plan sponsor clients.”
Notto gave his take on ERISA regulation, litigation and what it means for the industry overall.
What’s the biggest misconception with ERISA fiduciary?
If we’re looking from the plan sponsor perspective, it’s understanding that they can’t offload all their fiduciary responsibility, and perhaps even at a more basic level, many of them don’t even understand that they are fiduciaries and have fiduciary responsibilities.
What’s quite surprising is a lot of them who think they have offloaded all their responsibility believe they’ve offloaded it to their recordkeeper. Of course, you then talk to the record keeper and they throw up their hands and say, “No, that’s not us.”
People think when they hire a 3(38) they wash their hands of fiduciary responsibility. That’s not necessarily the case. Why?
That’s absolutely true. The hiring of a 3(38), like the hiring of any service provider, is itself a fiduciary act. A plan sponsor must bring to bear the same sorts of care, skill and diligence when hiring that service provider as they would in hiring any other service provider.
Now, it’s true that if you, as a plan sponsor, have prudently selected a 3(38) and continue to monitor that 3(38) provider to assure they continue to act appropriately and as a quality provider, then you don’t have to decide which investments to include on the plan’s menu. However, the requirement to continue to monitor that provider will still exist.
Can you provide a ‘simple’ definition of 3(38), 3(21) and 3(16)?
Sure. 3(21) is the vernacular used to describe a financial professional who provides investment advice for a fee to some other fiduciary who makes the ultimate investment decision.
The ERISA definition of a 3(38) is an investment manager that is hired by the fiduciary to actually make investment decisions for the plan—either or the entire plan or for perhaps just a portion of the plan’s assets.
The definition of a 3(16) is that of an administrator and is the entity that’s charged under ERISA with many of the administrative tasks and disclosure obligations that it requires.
For example, a 3(16) is the entity that is obliged to sign the Form 5500; it’s the 3(16) upon whose shoulders the responsibility of delivering required ERISA notices to participants falls, and so that’s the tasks of the 3(16). Typically, 3(16) is the plan sponsor. But like some of these other fiduciary duties under the 3s, as you say, the plan sponsors can hire somebody else to perform some, or all, of those duties.
How will recent regulation (Reg BI, the DOL’s fiduciary rule) impact some of this?
The now-defunct Department of Labor fiduciary rule would have made more financial professionals into 3(21) advice fiduciaries.
With Reg BI, I’m not sure to what extent that’s going to necessarily throw a monkey wrench into this, although it will certainly heighten the standards that apply to broker-dealers when giving investment recommendations to retail customers, including 401k participants.
I’m not sure it’s going to upend a lot of the things that we’ve been talking about as it relates to ERISA and 401k practices.
What about 401k litigation? Have we plateaued with the spate of lawsuits from Jerry Schlichter and others?
I do not see a plateauing of defined contribution plan lawsuits. In fact, I foresee more law firms being emboldened by the successes of the Jerry Schlichters, so I see more law firms entering the fray. We’re seeing novel theories being put forward, so I don’t see any let-up.
There have been some key victories lately for plan sponsors and some appellate decisions that have affirmed those victories of plan sponsors. But still, I think we’re going to continue to see activity in that area.
Regarding what impact it might have on the 3s, I think it’s helping those retirement planning practitioners who hold themselves out as fiduciaries; those who can provide 3(21) or 3(38) services to plan sponsors.
It’s highlighting the value of those types of practitioners, and I think plan sponsors are probably coming to recognize the value those sorts of individuals bring to the table.
Daniel A. Notto, managing director, is an ERISA strategist with Retirement Solutions at J.P. Morgan Asset Management (JPMAM). An ERISA attorney with more than 35 years of experience, Dan translates complex ERISA requirements into practical concepts to help further JPMAM’s services to retirement clients. He serves as a resource to JPMAM’s sales, product development and other professionals and helps communicate the firm’s perspectives on retirement issues to clients and prospects.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
