Group Retirement - Our Approach
What is a "Fiduciary" and what is a "Fiduciary Standard of Care"?
The word "Fiduciary" has become very popular of late, and can be seen and heard weekly now in the printed press and in the many digital forms of media. Recently, we have even seen the President of the United States call for those advising retirement accounts and retirement plans to become named fiduciaries and to adhere to a fiduciary standard of care. So, what exactly is a "Fiduciary"?
According to Cornell University Law School's Legal Information Institute, "A fiduciary duty is a legal duty to act solely in another party's interests. Parties owning this duty are called fiduciaries."
A fiduciary standard of care is generally viewed as the highest standard of customer care available under law. A fiduciary must avoid "self-dealing" or "conflicts of interests" in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him or her.
A fiduciary has a legal duty to act solely in the best interests of their client.
A Decision for Investors - Registered Investment Advisor or Broker-Dealer?
Most investors are not aware that there are two main types of financial advisors from which investors seek guidance. Both call themselves "financial advisors", "wealth management", "investment advisors", and "financial planners" along with many other similar professional titles. Both tell you how much you need to save for retirement, how to allocate your investments, which investments to select, whether to use a traditional or Roth IRA, etc. Their services, at first glance, are very similar. However, there is one discrete yet crucial difference between these two types of advisors. Legally, one of these advisors is governed by the Investment Advisors Act of 1940 and the other by the Securities and Exchange Act of 1934.
Advisors governed by the '34 Act are called Broker-Dealers. Years ago now, these advisors were called Stockbrokers. The most well-known Broker-Dealers are Merrill Lynch, Morgan Stanley, Wells Fargo, JP Morgan, Goldman Sachs, Raymond James, and Edward Jones, but there are thousands of lesser known independent Broker-Dealers as well.
Advisors governed by the '40 Act are called Registered Investment Advisors (RIA). RIA's are named Fiduciaries and must adhere to the aforementioned Fiduciary Standard of Care. That means, legally, they must place the interests of their clients ahead of their own interests and the interests of their own firm.
Broker-Dealers, on the other hand, operate under the '34 Act's "suitability" clause (also referred to as the "seller's exemption"). That means, legally, their advice may be totally self-serving and they may be well aware of better options for their client, yet they are deemed legally in compliance as long as the type of investment being offered is "suitable" based on the clients age, financial situation and risk tolerance. A Broker-Dealer's duty is to their company, not to their client. Over the years since the 2008-2009 "Great Recession" the large Broker-Dealers mentioned above have paid tens of billions of dollars in fines for violations related to putting their own interests above the interests of their clients. The courts have awarded these multi-billion settlements based on their assessments of the losses and financial injury to investors in working with and trusting these firms. Buyer beware.
A Decision for Trustees and Group Retirement Plan Sponsors- ERISA 3(21) Fiduciary or ERISA 3(38) Fiduciary?
Much like the cloak of secrecy surrounding the Registered Investment Advisor and the Broker-Dealer, there is equal opaqueness surrounding the roles a Registered Investment Advisor may serve in when advising trustees, committee members and plan sponsors with respect to their group retirement plan.
Registered Investment Advisors and Broker-Dealers advising group retirement plans acknowledge their fiduciary status, in writing, in three different ways: 1) they acknowledge no fiduciary responsibility at all, 2) they contract to serve as an ERISA section 3(21) fiduciary, or 3) they contract as an ERISA section 3(38) fiduciary. The numbers 3(21) and 3(38) reference sub-sections of the Employee Retirement Income Security Act (ERISA) which deals with the retirement plan's ability to provide for one or more named fiduciaries who have authority to manage certain operations and administration of the plan.
As a result of Registered Investment Advisors perpetually having to adhere to a fiduciary standard of care, it is unusual that a Registered Investment Advisor would not acknowledge their fiduciary status in writing as a 3(21) or 3(38) fiduciary. Broker-Dealers, in most cases, refuse outright to acknowledge any fiduciary responsibility at all. Non-fiduciary advisors have no legal duty to put the interests of plan participants above all else. As a non-fiduciary, it is allowable for their advice to be ridden with conflicts of interest and self-serving.
By contrast, a section 3(21) fiduciary has a duty to place the interests of plan participants and beneficiaries ahead of its own within the context of the services for which it accepts fiduciary responsibility. The 3(21) is forbidden from having conflicts of interest as well. A 3(21) fiduciary provides assistance in creating the plan's Investment Policy Statement, the investment menu, investment committee guidelines, participant guidance strategy, etc. But, the "final say" for all of these items and decisions still rests with the plan sponsor. As such, so does the liability in the eyes of the federal court and the U. S. Department of Labor.
According to nationally recognized, ERISA attorney, Ary Rosenbaum:
"In the number soup of ERISA fiduciaries, it is clear that the ERISA 3(38) fiduciary is the Cadillac of ERISA fiduciaries. There is nothing wrong with driving a Buick or Chevrolet, but the fact is that the 3(38) offers the plan sponsor the most liability protection."
The vital distinction between a 3(21) fiduciary's contract and a 3(38) fiduciary's contract is the word "discretion". As aforementioned, in the 3(21) arrangement, the 3(21) provides the plan sponsor with a variety of recommendations and suggestions, but the plan sponsor retains "final say", or full "discretion", in terms of implementing those recommendations and suggestions. In the 3(38) engagement, the 3(38) provides guidance surrounding many of the same topics (the IPS, allocation categories, investment menu and fees). However, the plan sponsor, via the 3(38)'s contract with the plan sponsor, affords the 3(38) with "discretion" over the menu. In the court of federal and ERISA law, this discretion translates into the 3(38) having the "final say". Affording the 3(38) investment manager with discretion over the plan's investment line-up and related fees is the legal mechanism by which plan sponsors transfer risk from the company offering the retirement plan to the third-party 3(38) fiduciary. Neither a non-fiduciary advisor (broker-dealer, insurance agent, etc) nor an ERISA section 3(21) fiduciary advisor enable plan sponsors to cede this material corporate risk.
Plan sponsors are able to definitively determine what type of advisor is engaged on their plan by reviewing the applicable service contract. That being said, it is highly recommended that an expert in such matters, such as Ironview or an ERISA attorney, be consulted to assist in such an exercise. Unfortunately, there is an entire cottage industry of advisors and retirement plan providers who claim co-fiduciary status, yet their contract with the plan sponsor says differently. Some go as far as to offer a "Fiduciary Warranty" or have the word "Fiduciary" in their title, company or marketing materials. Yet, their contracts "carve out" or excuse them from offering true section 3(21) or 3(38) fiduciary status and accountability.
See the attached Fiduciary Advisor Comparison Chart.
Ironview is an independent, U.S. SEC governed, Registered Investment Advisor (RIA) providing fiduciary oversight and investment advisory services to group retirement plan sponsors and plan participants. Ironview serves as both an ERISA 3(21) fiduciary and an ERISA 3(38) Investment Manager advising on plans governed by the Employee Retirement Income Security Act (ERISA). Ironview currently advises approximately 100 corporate clients with retirement plans ranging in size from approximately $1mm in plan assets to over $150mm in plan assets.