Three Types of Fiduciaries−and Why Plan Sponsors Should Care

Written by Smart Investor | 17 August 2010

Depending on the context, the term "fiduciary" can have different meanings. Although the Employee Retirement Income Security Act of 1974 (ERISA) defines six categories of fiduciaries, the three kinds of fiduciaries identified by the Foundation for Fiduciary Studies−Investment Steward, Investment Advisor, and Investment Manager−are typically the most relevant to 401(k) plan sponsors.

Plan sponsors like you fall into the "investment steward" category. You bear big responsibilities. However, the other two kinds of fiduciaries can ease your burden.

1. Investment Steward—This refers to people like you−trustees, investment committee members, and other representatives or employees of plan sponsors. You must act in accordance with "Your Top Five Fiduciary Responsibilities According to DOL" or face the consequences, as we've discussed in "Top Three Reasons Why You Should Care About Your Fiduciary Duty."

Of these three types of fiduciaries, you probably have the least amount of investment training. Yet you are responsible for managing all of the fiduciary responsibilities for your plan's investment portfolio. If you've learned anything at all about your role, you're probably concerned about the complexities of your compliance with DOL regulations and meeting your fiduciary obligations.

2. Investment Advisor—Investment advisors give "big picture" advice to retirement plans. For example, they can:

• Help you to create an investment policy statement and asset allocation
• Screen, select, and monitor the professionals who manage your 401(k) plan's investment assets, ensuring that you're paying reasonable fees as defined under ERISA by the Department of Labor
• Advise you on topics such as setting up an automatic enrollment plan for your employee that helps them, while protecting you from financial risks

These types of fiduciaries are generally known as 3(21) limited scope fiduciaries. Often there is a great deal of confusion surrounding this type of arrangement. Plan sponsors sometimes feel that because “the advisor is the expert” they have shifted their investment fiduciary liability to the advisor. However, this may not be true. It is critical to review your service agreement with this type of advisor. Why? Because it sometimes includes language stating that the advisor is not a fiduciary and only provides “recommendations.” In this case, the liability remains with you.

While your provider may in fact be a “functional” fiduciary, sometimes it denies fiduciary status. For example, this happened in the case of Charters vs. John Hancock, where the court found that John Hancock was in fact a fiduciary, even though John Hancock denied it. As we have previously discussed, the way to ensure the advisor serves as a fiduciary is to get him or her to acknowledge it in writing before you engage their services.

3. Investment Manager—Investment Managers have discretion to select, purchase, and monitor the investment options made available to plan participants.

The Investment Manager's service agreement expressly acknowledges in writing that it is a fiduciary and owes a Duty of Loyalty to the plan participants (the beneficiaries of the retirement plan trust). The plan sponsor can successfully delegate the investment management functions and the resulting liability exposure as long as the fiduciary has accepted these responsibilities in writing and is qualified as a bank, insurance company or registered investment advisor. Of course, the plan sponsor must document that it prudently selected and monitors the Investment Manager. This type of fiduciary is a prudent expert and generally known as a 3(38) Investment Manager.

This is the role that Smart Investor, as a registered investment adviser, serves for our retirement plan clients.

If you'd like to learn more, please call me at 916-435-2100 or email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . I'd be happy to talk with you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Investment advice offered through Smart Investor, a Registered Investment Adviser.