ERISA 3(38) Fiduciary Services
Most companies and organizations’ human resources departments and C-suites are seeking efficiencies and risk mitigation for their entities. For those, and a myriad of other reasons 3(38) fiduciary discretionary investment management services are getting a closer look by plan sponsors.
In exploring these 3(38) services it is important to know that when you hear “3(38)” or “3(21)” it is understood that these are sections of ERISA that provide definitions for certain types of fiduciaries. As a result, it is important to understand there are significant differences between an ERISA 3(21) and 3(38) advisor in terms of investment services provided to the plan.
Simply stated, the ERISA 3(21) advisor makes investment recommendations to the plan fiduciaries (committee), but the decision to implement the recommendations and attendant legal responsibility still fall on the plan fiduciaries (oftentimes an authorized committee). “You can’t blindly follow the recommendations of the 3(21) advisor. You have to make an independent decision, and though that’s usually what the advisor recommends, you’re not excused from making an informed decision just because the advisor recommended it,” says Carol Buckmann, Esq.1
Buckmann cautions, “You don’t get told about the tremendous level of risk that you take on as the plan fiduciary when you start a 401(k)” …. Carol’s insight revealed “…a litigation landscape littered with the lawsuits of plan sponsors who didn’t do their due diligence.” … (in a 3(21) environment)1
The ERISA 3(38) advisor encompasses the 3(21) responsibilities plus makes the actual investment selections and decisions based on plan needs and goals as conveyed to him by plan fiduciaries, so the 3(38) advisor is responsible for its own mistakes or mismanagement including reasonableness of performance and expenses. The plan fiduciaries are responsible for prudently selecting a good 3(38) fiduciary and monitoring performance. But in terms of financial liability, if an ERISA 3(38) advisor is prudently appointed and monitored by the authorized fiduciary, the plan sponsor should not be liable under ERISA for the acts or omissions of the investment manager and will not be required to invest or otherwise manage any asset of the plan which is subject to the authority of the investment manager.2
A 3(38) Fiduciary may be a better choice for you if you want to maximize fiduciary liability protection for selection and monitoring plan investments, and/or have no internal plan fiduciary with the requisite expertise & credentialing to assume investment decisions and liabilities. Note that even a 3(38) cannot completely remove plan fiduciaries from all investment liability, as they retain the responsibility of monitoring the 3(38) advisor with regards to their suitability for the plan. However, the outsourcing of investment-related fiduciary responsibilities should also lessen the amount of time and attention that plan sponsors need to spend administering their plan.
A 3(21) Fiduciary may be a better choice if you have the time, interest and investment expertise needed to monitor investment performance regularly, evaluate the 3(21)’s recommendations, and evidence that your investment decisions are in the best interest of your plan participants while assuming the liability for determining reasonableness of investment costs and performance. The 3(21) advisor’s job is to identify investments that are appropriate for the purposes of the plan and make recommendations to the plan’s fiduciaries. The plan’s investment committee is responsible for determining suitability for their plan from cost/benefit, risk/reward perspectives as well as appropriateness for your participants and plan goals.
Newly available pooled employer plans (you may have heard them referred to as PEPs) often incorporate a 3(38) investment advisor and other elements/entities meant to help plan sponsors offload fiduciary responsibilities, potentially lower costs and streamline administration.
1 Carol Buckmann is a founding partner at Cohen & Buckmann PC, a boutique law firm practicing exclusively in the areas of employee benefits, executive compensation and investment adviser law. https://www.forusall.com/401k-blog/3-21-fiduciary-vs-3-38/
2 ERISA Section 405(d)(1) https://advisor.morganstanley.com/the-trc-group/documents/field/t/tr/trc-group/Understanding_3_21_v_3_38_Fiduciary.pdf
What is an appropriate interest rate for plan loans?
Both, ERISA and the IRS requires that DC plan loans reflect a “reasonable rate of interest”.
DOL Reg Section 2550.408b-1 states that “a loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” A pre-existing DOL Advisory Opinion, 81-12A, suggests that plan sponsors should align their plan interest rate with the interest rate banks utilize.
The IRS has a similar requirement where they informally state that the Prime Rate plus 2% would be considered to be a reasonable rate. Some plans use the Prime Rate plus 1%, or a rate based on the Moody’s Corporate Bond Yield Average.
Plan sponsors should document justification for the plan loan interest rate selected.
Thanks for the Memories: Gratitude and Financial Wellness
So much about financial wellness has to do with cultivating a mindset that favors delayed versus immediate gratification. In the language of behavioral economics, the tendency to prefer short-term rewards is called hyperbolic discounting. This often leads to more impulsive decision-making, and it can feed excessive personal debt and hamper retirement readiness over time, whereas those (typically in the minority) who will wait for a larger reward are frequently described as “present-based.”
So how do you help your employees resist the “urge to splurge” and prioritize saving for retirement instead? It certainly seems like a tall order, given that it runs counter to tenets of fundamental human psychology. But what if the answer could be as simple as a little well-timed gratitude?
Interestingly, research out of the University of California, Riverside, Harvard Kennedy School and Northeastern University suggests that may just be the case. In a revealing experiment, subjects were offered either $54 immediately or $80 in a month. The participants were randomly divided into two groups and asked to write about an event from their past that elicited either happy, neutral or grateful feelings. Depending on what they wrote about, the researchers found that the subjects made quite different money decisions.
Those directed to write about a “grateful” memory were more likely to wait for the larger, delayed payout. Interestingly, subjects in the happy memory group were just as impatient as the neutral memory group. These findings are striking, especially given that that the recalled memory didn’t have to be spending- or even money-related.
But how do these findings relate to financial decision making in the real world?
The Price of Impatience
While in this study the “cost” of impatience was limited to $26, employees that struggle with delaying gratification and prioritizing saving for the future will no doubt pay a much higher price. They may need to remain in the workforce longer. They’ll also likely experience higher levels of stress, especially as they approach the date they hoped to retire by. They may also accrue excessive debt, which may adversely impact their standard of living — especially during their golden years.
How Employers Can Help
According to Forbes, building a culture of gratitude in the workplace has a tremendous upside — for both workers and employers. Employees tend to find working in a more grateful environment a more positive and rewarding experience. And being appreciated by people other than one’s supervisor can provide a boost in morale. Teamwork is encouraged even as it exists alongside healthy competition. And while all of these organizational benefits take hold, it turns out that you may also be helping workers with their long-term financial decision making.
Companies are creating ecosystems of gratitude in a variety of ways. Some have instituted “Thankful Thursdays,” where employees have the chance to publicly show appreciation for coworkers who’ve gone above and beyond with an award or small prize, followed by snacks for all as a tangible show of thanks on behalf of the company.
Fostering a culture of gratitude is like financial wellness programming “with benefits” — ones that can enhance your entire organization.
Online Security Tips From The Department Of Labor
You can reduce the risk of fraud and loss to your retirement account by following these basic rules:
REGISTER, SET UP AND ROUTINELY MONITOR YOUR ONLINE ACCOUNT
Maintaining online access to your retirement account allows you to protect and manage your investment.
Regularly checking your retirement account reduces the risk of fraudulent account access.
Failing to register for an online account may enable cybercriminals to assume your online identity.
USE STRONG AND UNIQUE PASSWORDS
Don’t use dictionary words.
Use letters (both upper and lower case), numbers, and special characters.
Don’t use letters and numbers in sequence (no “abc”, “567”, etc.).
Use 14 or more characters.
Don’t write passwords down.
Consider using a secure password manager to help create and track passwords.
Change passwords every 120 days, or if there’s a security breach.
Don’t share, reuse, or repeat passwords.
USE MULTI-FACTOR AUTHENTICATION
Multi-Factor Authentication (also called two-factor authentication) requires a second credential to verify your identity (for example, entering a code sent in real-time by text message or email).
KEEP PERSONAL CONTACT INFORMATION CURRENT
Update your contact information when it changes, so you can be reached if there’s a problem.
Select multiple communication options.
CLOSE OR DELETE UNUSED ACCOUNTS
The smaller your on-line presence, the more secure your information. Close unused accounts to minimize your vulnerability.
Sign up for account activity notifications.
BE WARY OF FREE WI-FI
Free Wi-Fi networks, such as the public Wi-Fi available at airports, hotels, or coffee shops pose security risks that may give criminals access to your personal information.
A better option is to use your cellphone or home network.
BEWARE OF PHISHING ATTACKS
Phishing attacks aim to trick you into sharing your passwords, account numbers, and sensitive information, and gain access to your accounts. A phishing message may look like it comes from a trusted organization, to lure you to click on a dangerous link or pass along confidential information.
Common warning signs of phishing attacks include:
A text message or email that you didn’t expect or that comes from a person or service you don’t know or use.
Spelling errors or poor grammar.
Mismatched links (a seemingly legitimate link sends you to an unexpected address). Often, but not always, you can spot this by hovering your mouse over the link without clicking on it, so that your browser displays the actual destination.
Shortened or odd links or addresses.
An email request for your account number or personal information (legitimate providers should never send you emails or texts asking for your password, account number, personal information, or answers to security questions).
Offers or messages that seem too good to be true, express great urgency, or are aggressive and scary.
Strange or mismatched sender addresses.
Anything else that makes you feel uneasy.
USE ANTIVIRUS SOFTWARE AND KEEP APPS AND SOFTWARE CURRENT
Make sure that you have trustworthy antivirus software installed and updated to protect your computers and mobile devices from viruses and malware. Keep all your software up to date with the latest patches and upgrades. Many vendors offer automatic updates.