Not All Fiduciary Services Are Created Equal | Capital Group

Defined Contribution Insights

October 2012

Not All Fiduciary Services Are Created Equal

Both recent and anticipated retirement plan regulations have heightened plan sponsors’ concerns about their fiduciary responsibilities. Among their concerns is selecting and monitoring plan investment lineups.

As a plan fiduciary, you’re required by the Employee Retirement Income Security Act (ERISA) to act in the best interests of participants in your plan. This includes ensuring that your plan offers a lineup of investments from which participants have the potential to create a well-diversified portfolio, to help minimize the risk of larger losses.

Turning to Third Parties

Faced with these responsibilities and related potential liability, many plan sponsors are turning to third parties — financial professionals or independent third-party fiduciaries — for help with selecting and monitoring plan investments.

In a Nutshell

Typically, third-party fiduciary service providers offer:

  • ERISA 3(21) Investment Advisor: The investment adviser recommends investments for the plan, but sponsors must approve those recommendations.
  • ERISA 3(38) Investment Manager: The investment manager has full discretion to select investments for the plan’s lineup.

In short, the key difference between a 3(21) and 3(38) fiduciary is who retains discretion over investment lineup decisions.

In either case, it’s important to note that the named fiduciary — typically the plan sponsor or an investment committee — is never completely relieved of fiduciary responsibility. That’s because choosing a fiduciary is, in itself, a fiduciary act.

Evaluating and Comparing Third-Party Fiduciary Service Providers

Among third-party fiduciaries, services may appear to be similar, though a closer look can reveal important differences. How the contracts are arranged, the pricing methodology and, most important, the investment screening process can vary substantially.

To help you conduct due diligence when evaluating third-party fiduciaries, the following pages offer a detailed discussion of key considerations.

1. Service provider experience and reputation: What qualifies the firm to serve in this capacity?

  • How long has the firm evaluated and recommended investments for retirement plans?
  • Does staffing level and experience reflect a commitment to the business?

2. Investment evaluation: How does the firm screen investments?

  • What process does the firm use to evaluate investments?
  • What factors are considered?
  • Is the methodology well-documented and prudent?

3. Pricing (and possible bias or conflict of interest): Is the price reasonable? Is there a potential conflict of interest?

  • Does the plan provider claim the services are “free”? Even if the service fees are embedded in the recordkeeping fees or the investment expense ratios, someone is paying the fees.
  • Who pays the third party — the plan sponsor or the plan provider? If the plan provider pays the fees and has proprietary investments in the plan, this arrangement could be considered a conflict of interest.

4. Fiduciary coverage: What does the program cover?

  • Does the firm acknowledge, in writing, that it will serve as a fiduciary, as defined under ERISA?
  • What does the program cover?
  • What doesn’t the program cover?
  • Will the program designate a QDIA for the plan?

5. Plan support and benefits: What services does the firm offer?

  • What’s the range of services offered? Some firms, for example, won’t permit inclusion of noncovered investments — such as sector investments, self-directed brokerage windows or employer stock — without voiding the agreement.
  • Does the firm’s menu of services meet the plan’s needs?

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.