Role of Fiduciaries in Retirement Plans

Retirement plans offer various benefits to employers and their employees. Although the Employee Retirement Income Security Act (ERISA) of 1974 has set guidelines and long-imposed standards for those who manage these retirement plans, the governance of these plans has attracted media attention and several litigations from organizations and retirement plan participants. Because of this continuous scrutiny, it is critical that plan fiduciaries completely understand their roles and responsibilities and comply with all the rules, regulations, and standards applicable to them.

A fiduciary, in common terms, is a person who has a duty of care and trust towards another person and should act primarily for the benefit of others for an agreed set of activities. In terms of retirement plans, the law defines the tasks that require fiduciary duties and the extent of those duties.

There are various tasks that require hiring a fiduciary for operating a qualified retirement plan, such as whether to appoint someone to manage the plan or do it in-house. Taking full control of the plan assets or using discretion in managing the plan makes the plan sponsor or the entity it hires a plan fiduciary to the extent of that discretion or control. Fiduciary status is based on the tasks at hand for the plan and not a title. In fact, hiring a third party to perform fiduciary functions is itself a fiduciary act.

However, not all plan decisions are related to fiduciary; some are business-related. For example, the decisions to set up a plan, add features, make changes, or terminate a plan are all business decisions. When a plan sponsor makes these decisions, they act for their business, not the plan. Therefore, they do not count as fiduciary decisions. However, when steps are taken to implement these decisions, the plan sponsor acts for the plan as a fiduciary.

Types of fiduciaries

  • Named fiduciaries: For every plan, there must be one or more ‘named fiduciaries’ who have the authority to control its operation and administration. The plan document must mention the named fiduciary or pursuant to a procedure specified in the plan. Additionally, ERISA defines other roles such as investment manager, plan administrator, discretionary trustee, and investment advisor as fiduciary roles.
  • Functional fiduciaries: An individual who is not acting as a ‘named fiduciary’ may still be a fiduciary as per ERISA’s fiduciary definition to the extent he/she:
    • Has any kind of discretionary authority or discretionary control over the management of a plan or the disposition of its assets
    • Offers investment advice to plan participants in exchange for a fee or has any authority or responsibility to do so
    • Has any discretionary authority or responsibility over the administration of a plan
  • Common fiduciaries: These are employers / plan sponsors who maintain plans and are typically fiduciaries, either due to their being named fiduciaries or acting as functional fiduciaries. In these cases, the employer acts in a dual capacity – a fiduciary to the plan and an employer.

401(k) plans, which are also the most common types of retirement plans offered by companies, work with three types of fiduciaries: 3(16), 3(21), and 3(38). The ‘3,’ which is common in 3(16), 3(21), and 3(38), is derived from Section 3 of ERISA, which contains the rules and defines fiduciary roles into three separate sections, with 3(16) fiduciaries overseeing the administration of the plan, 3(21) fiduciaries making investment recommendations, and 3(38) fiduciaries managing investments.

Basic roles and responsibilities of a fiduciary in retirement plans

ERISA defines fiduciary duties that are applicable and relevant to retirement plans. These duties include:

  • Acting solely in the interest of the participants and beneficiaries: Fiduciaries should only make decisions in the best interests of the retirement plan participants and beneficiaries, not the ones beneficial to them or others.
  • Acting for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of the plan: Anybody who acts in a fiduciary capacity should not use the plan’s assets for any purpose other than providing benefits to plan participants and beneficiaries or defraying reasonable expenses of the plan.
  • Carrying out their duties with care, skill, prudence, and diligence: Fiduciaries must fulfill their roles to the best of their abilities and as if they are managing their own assets.
  • Following the plan documents: Fiduciaries are required to abide by all terms of the plan document, and any applicable laws and regulations.
  • Diversifying plan investments: Fiduciaries must focus on diversifying the plan’s investments to minimize risk and maximize returns.

Considerations and factors while choosing an external fiduciary service provider

  • Fees: The fees can vary a lot from one fiduciary services provider to another. It is imperative to seek and compare the fee structures of different providers to ensure that the employer is getting the best deal.
  • Services: Different fiduciaries offer different services. For example, some providers only offer plan design and administration, while others also offer investment management and participant education. Therefore, employers should select a provider as per their own needs and requirements.
  • Experience and affiliations: The employers should weigh the benefits and risks of an experienced provider, who has been in the business for many years with a ton of experience, vs. newer ones, who might be cheaper and might offer more innovative services. Other things to consider include the firm’s affiliations, financial condition, and assets under their control.
  • Investment strategy: Evaluate how the firm plans to invest its assets or how it will handle participant investment directions.
  • Reputation: The reputation of the provider is also an important consideration. The employer should conduct some background research before engaging with a provider.

Top Asset and Wealth Management (A&WM) companies offering fiduciary services for retirement plans and why

Several prominent players, such as Vanguard, Fidelity, Charles Schwab, T. Row Price, Principal Financial, and Betterment, offer a variety of services, including plan design, administration, investment management, and participant education. They can also help in complying with ERISA and other applicable laws and regulations. Some of the examples include:

Fiduciary Services for Retirement Plans
• Offers 3(16) fiduciary administration services that ease the administrative burden of managing a retirement plan
• Provides services such as data monitoring, notice delivery, signing and filling form 5500, annual plan compliance and reporting, and participant distribution services to employers
Voya Financial
• Offers fiduciary solutions designed to help employers navigate through the demanding regulatory landscape while meeting their fiduciary responsibilities
• Provides an advisory services program called Voya Retirement Advisors (VRA) powered by Morningstar for retirement plan participants and serves as the fiduciary; employers gain a streamlined experience by having recordkeeping and advice services through one provider
• Offers 1:1 support for participants to connect with VRA investment advisor representatives through phone or in person for personalized help with their retirement savings and planning goals
• Provides integrated experience within the participant website and mobile app
• Offers advisory services that help employees stay updated about their finances and reach their long-term goals; provides plan sponsors with a fiduciary solution to help their employees meet their retirement goals, and provides a comprehensive solution built around plans, employees, their life changes, and unique future goals
• Advisory services comprise two fiduciary advice solutions:
  o My Total Retirement: My Total Retirement and Online Advice, powered by Morningstar Investment Management
  o The Professional Management Program: The Professional Management Program and Online Advice, powered by Edelman Financial Engines
• Provides 3(21) or 3(38) participant-level fiduciary advice on a variety of topics, including savings strategies (pretax or Roth), savings rates, investments, distributions, financial planning (budgeting, debt management, etc.), and retirement income planning
• Offers fiduciary and trustee services in addition to Empower Institutional, its core retirement plan recordkeeping platform
Lincoln Financial
• Provides a range of fiduciary and compliance services, including plan reporting, preparation of notices, assistance with preparation of forms, testing, and monitoring of limits and deferrals. When it comes to fiduciary responsibilities, Lincoln offers access to a diversified line-up of investment options in addition to helpful tools and resources, such as annual plan review documents
• Offers managed account services with access to ongoing fiduciary support through third-party fiduciaries such as Morningstar Investment Management; does not act as a fiduciary
• Provides target date funds with access to 3(38) fiduciary support from Morningstar
Principal Financial
• Offers investment fiduciary support services that help provide indemnification protection against two key areas of concern:
  o Qualified default investment alternative (QDIA) coverage
  o Prudent selection and monitoring
• Offers defined contribution plan services, including plan and investment fiduciary support, to help the client stay compliant
• Provides Personal Advisor and Personal Advisor Select services, wherein advisors act as fiduciaries in the client’s best interests
Equitable (AXA US)
• Offers Equitable Retirement Vision program, which includes the following features and services:
  o Fiduciary support for plan sponsors, including 3(16) administrative fiduciary services to reduce administrative burdens and mitigate liability for plan sponsors; 3(21) and 3(38) investment fiduciary services to assist plan sponsors with fund selection and mitigate fiduciary liability
• Provides extra fiduciary oversight to plan sponsors with two options of registered investment advisors, Wilshire Investment Advisory Group or SWBC Retirement Plan Services
• Offers Nationwide 3(38) and 3(21) investment fiduciary service option:
  o The 3(38) and 3(21) investment fiduciary service options are available through third-party partners (IRON Fiduciary, LeafHouse Financial, and Wilshire Associates) that will assume ERISA 3(38) and/or 3(21) investment fiduciary responsibility
• Provides services that are designed for:
  o Retirement plan clients who are concerned about their fiduciary responsibilities and legal liabilities under ERISA
  o Financial professionals who are concerned about the heightened regulatory environment surrounding fiduciary services that they may be providing to clients

Reasons why top A&WM companies provide fiduciary services:

  • To comply with regulatory requirements: ERISA requires fiduciaries to manage plans in the best interests of participants and beneficiaries. It means that they must act prudently and avoid any conflicts of interest. A&WM companies can help clients comply with ERISA regulations and other applicable laws and guidelines.
  • To have an edge over their competitors: The retirement industry is increasingly becoming competitive, and top A&WM companies are looking for ways to differentiate themselves from their competitors. By providing fiduciary services, they not only expand the breadth and depth of their services, but also demonstrate commitment to prioritizing the interests of their clients.
  • To provide peace of mind to clients: Many clients have concerns regarding potential conflicts of interest when they engage with a financial advisor. Sometimes, clients also doubt if the best products are being offered to them or those that are more profitable to advisors. By offering fiduciary services, A&WM companies can address these concerns and assure clients that their interests are being put first.

This topic has become critical over the years

The topic of fiduciaries has come under the radar in the retirement plan industry recently for several reasons, including:

  • Retirement plans becoming more complex: The complexity of retirement plans has increased in recent years due to a wide variety of investment options being offered and more intricate tax rules. Therefore, plan participants need guidance and support to make informed decisions about their retirement savings.
  • Increased demand for fee-only financial advisors: Fee-only financial advisors are in demand these days from investors and plan participants. These advisors charge fees for their services instead of commissions from the sale of products. Such advisors have a fiduciary duty to their clients, as they do not earn based on the products they sell.
  • Ever-growing number of lawsuits: In recent years, the number of lawsuits against fiduciaries for failing to meet their duties has grown multifold. These lawsuits depict the importance and absolute need of fiduciaries to act in the best interests of plan participants and beneficiaries. Fiduciary breaches, specifically, can result in severe consequences such as:
    • Legal and financial ramifications: Significant penalties, including fines, lawsuits, and even criminal charges, can be imposed.
    • Adverse impact on plan participants: When fiduciary duties are breached, end results can reduce the retirement savings of plan participants and lower financial security.
    • Reputational risk: Fiduciary breaches can result in severe reputational damage for the fiduciary and the organization they represent. It can make attracting potential and retaining existing employees difficult.
    • Remedies and corrective actions: When a fiduciary breach occurs, appropriate remedial and corrective actions need to be taken to address and control the situation and prevent future occurrences.

Considering all these factors, it is important for fiduciaries to fully understand their duties and take appropriate steps to discharge them. Also, the increased spotlight on fiduciary duties in the retirement plan industry is a positive trend, as it ensures that retirement plans are managed efficiently, and that plan participants and beneficiaries can meet their retirement goals.

How can Evalueserve help?

Evalueserve provides managed services, wherein the domain experts act as an extension of client teams (competitive intelligence, corporate strategy, brand and market strategy, product intelligence, etc.), helping them with market and competitive intelligence solutions focused on the workplace retirement market. We deliver timely and actionable insights, empowering firms and executives working in the retirement industry to make well-informed and precise decisions.

Such firms and executives can stay updated with the latest industry trends, regulations, market opportunities, and competitor insights. It helps them make strategic business decisions relating to new investments, potential M&As, expand/bolster existing product and service offerings, and others.

Our domain experts have knowledge of more than 90 databases that are leveraged to assist clients in various strategic analyses and repetitive, day-to-day, and ad-hoc projects, as well as other things such as leadership connects and internal publications.

Here's how Evalueserve can assist clients in these areas:

  • Market intelligence: Evalueserve's team helps the client to track market trends and identify emerging opportunities, enabling them to make informed decisions about their products, services, and strategies, as well as develop go-to-market strategies for new products and services.
  • Competitor insights: The company collects a substantial volume of competitor data from various sources; generates in-depth insights regarding the competitive landscape, strategies, capabilities, and offerings; and helps clients develop a more effective business strategy.
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Garima Malik
Senior Manager, Asset and Wealth Management Posts

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