Advisers can take on a variety of fiduciary roles. But, right now, the fiduciary investment advice industry is in a state of flux, and it looks like the number of 3(38) investment managers is set to grow, according to a panel of experts at the 2015 PLANADVISER National Conference.
Daniel Notto, senior vice president and senior retirement plan counsel at AB, formerly AllianceBernstein, explained to conference attendees that Section 3 of the Employee Retirement Income Security Act (ERISA) is the definitional section. Subsection 3(16) contains the definition of a plan administrator, which includes duties of government and retirement plan participant disclosures.
Grant Arends, president of consulting services at Alliance Benefit Group of Kansas City, Inc., said some recordkeepers have taken on a 3(16) role, moving from outsourcing to performing administrative tasks themselves and functioning as fiduciaries. However, there are few recordkeepers wanting to do that; the trend is in its infancy.
“Recordkeepers fear a fiduciary role because they process hundreds and even thousands of transactions per day; it’s scary to have fiduciary responsibility for those,” Arends noted.
Craig A. Bitman, a partner at Morgan, Lewis & Bockius LLP, added that there hasn’t been an explosion of recordkeepers or advisers taking a 3(16) role because of all the litigation about plan document language and disclosures. “This seems to be where you get the one-off, single-plaintiff litigation that is annoying and time consuming to deal with,” he said.
It’s tricky because plan sponsors don’t want to give up control of everything; for example, they many want to handle messaging to participants on their own, according to Bitman. “There are all shades of grey in between the three types of fiduciary service, for which plan sponsors can retain responsibility,” he noted. Advisers should make sure plan sponsor clients line up their plan document with a provider’s 3(16) contract and duties, because someone still named in the plan document can get dragged into a lawsuit.
Arends suggested if plan advisers are looking for 3(16) services for clients, they should read the fine print in contracts, because 3(16) can mean different things from different providers.NEXT: The move to 3(38) investment managers
ERISA also provides definitions of 3(21) investment advisers and 3(38) investment managers. According to Arends, there is greater momentum for the use of fiduciary services due to the Department of Labor’s (DOL) proposed fiduciary rule. Plan sponsors are looking for fiduciary services.
Notto noted that thanks to the proposed fiduciary rule, just about anyone who provides investment services will be a fiduciary. “Like it or not, anyone who wants to stay in the business will have to accept being a fiduciary,” he told conference attendees.
The main importance of a 3(21) adviser is setting a process for selecting and monitoring funds and making a recommendation, but the retirement plan committee actually votes and makes the final decision about investment choices, Arends said. He noted that many plan sponsors are migrating to 3(38) services because 99% of the time, they accept an investment adviser’s recommendations, yet they are taking on all the fiduciary responsibility for selection.
According to Bitman, the U.S. Supreme Court decision in Tibble v. Edison International also led plan sponsors to pay more attention to the duty to monitor investments. “From a litigation perspective, the difference between 3(21) and 3(38) is somewhat marginal, advisers will get dragged into a lawsuit regardless of which fiduciary role they take. I think a lot of advisers are realizing it’s not much of a step to go from 3(21) to 3(38),” he said.
Bitman noted that the processes for performing 3(21) or 3(38) fiduciary functions is the same, the difference is between making recommendations and executing decisions. “The timing is better if you’re a 3(38),” he said. “If something happens in the market, a 3(38) can make changes faster than if he had to wait for a plan sponsor decision.”
Some clients are confident in an investment manager’s ability to select investments, but there may be a whole list of requirements clients may want to see addressed in the selection process, Bitman added. “There’s no standard contract, advisers will have to individualize them.”
He also said the DOL must expand its fiduciary rule for a seller’s exception. “How can I get into a new client relationship or make any kind of upsell if just explaining products and services will trigger fiduciary status?” he queried.