In a press release, Securian points out that some employers are fine with making the selection of retirement plan investment options themselves because they have in-house investment expertise. Others have some knowledge, but not enough to make the investment selections without some advice from an expert. A third group prefers to delegate that responsibility completely.
In the article, “Choosing the right level of investment liability: 5 questions for plan sponsors,” Kirk Paulsen, senior associate actuary, Securian Retirement, describes the three fiduciary roles available to plan sponsors under sections 3(21) and 3(38) of ERISA (Employee Retirement Income Security Act). In general, the plan sponsor holds complete fiduciary responsibility for retirement plan investment selection; however under a properly structured ERISA section 3(38) program, the employer’s fiduciary responsibility extends only to the selection of an investment manager, according to the press release.
In the paper, Paulsen offers five criteria employers can use to determine the level of investment fiduciary liability to keep or transfer:
- Do conflicts of interest exist? It’s a conflict of interest when a fund company requires employers to select a pre-defined group of investments rather than single options that best fit that company’s plan.
- What’s my investment knowledge? Does the plan sponsor have enough in-house expertise to handle investment selection and the liability that accompanies it?
- What’s my preferred level of involvement? In other words, how much time do I want to spend analyzing, comparing, and selecting retirement plan investments? An employer that does not want to divert senior management from core responsibilities may decide to hire an expert.
- What’s my liability comfort level? As plan fiduciary, the employer is responsible for all investment selection discussions and outcomes. The least risky option is to transfer those responsibilities to an investment manager under a properly structured section 3(38) arrangement.
- What’s my price point? The more outside expertise a company uses to manage the retirement plan, the more it’s going to cost. However, the risk reduction may be worth it.