Provide guidance that maximizes fiduciary protection for clients
held to high performance standards and are legally accountable for many aspects of plan oversight. This includes the
time- and resource-intensive endeavor of conducting continual due diligence on the investments offered by a plan.
In the past, this responsibility was shouldered by employers, despite the fact that they were completely unfamiliar with this type of research. This was particularly problematic for small business owners, as many weren’t even aware that they were acting as fiduciaries when it came to selecting and monitoring their plans’ menus.
Today, financial professionals can help employers of all sizes manage their fiduciary exposure by offering investment fiduciary services, either directly or through a third-party vendor.
Providing fiduciary protection can help employers manage risk related to a retirement plan’s investments, and are typically conducted by financial professionals and/or independent investment consulting firms that specialize in manager due diligence and asset allocation.
These individuals and firms assume fiduciary responsibility for identifying and monitoring suitable investment options for retirement plans, taking into account items such as investment performance, organizational changes, style consistency, and expenses.
A program that manages fiduciary risk offers several benefits, including:
- Years of specialized experience—Financial professionals and independent investment consulting firms have insight into areas that are mostly unknown to individuals acting as fiduciaries.
- A degree of safety—Protection may be provided for employers against certain claims and expenses brought about by employee lawsuits.
- Improved investment selection—A formal process for protecting against fiduciary risk helps ensure that employers create an appropriate investment menu through documented procedures.
Two of the most popular approaches to providing investment fiduciary protection are designated 3(38) and 3(21) fiduciary protection. The primary distinction between the two is discretionary authority over the selection and monitoring of plan investments.
3(38) Fiduciary Protection
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3(21) Fiduciary
Protection
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Level of Protection
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Investment Selection
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An employer selects the initial investment menu from an approved fund list options. A financial professional or consulting firm manages the menu from there. |
An employer creates the investment menu from the approved fund list. A financial professional or consulting firm provides recommendations for how to update it going forward. |
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Best for
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Employers looking to hand over control of ongoing investment decisions in return for complete fiduciary coverage. |
Employers who want to stay involved in the investment selection process while reducing fiduciary liability. |
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With the Department of Labor currently working to re-define what it means to be a fiduciary, there’s a strong possibility that investment fiduciary services will gain greater prominence in the retirement plan landscape. In fact, all asset managers in a Cerulli Associates survey of investment-only managers expect this to be the case.
For retirement plan fiduciaries that are required to always act in the best interests of plan participants, investment fiduciary programs offer reduced risk exposure and a simple way to oversee a plan’s investments. They also provide an added layer of independent protection that allows financial professionals to provide both the guidance their clients depend on and the coverage their clients seek.
1Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.