ERISA Fiduciaries: Ain’t Nothing Like The Real Thing

Marvin Gaye and Tammi Terrell were right in their song that Ain’t Nothing Like the Real Thing”. Anything other than the real thing is a pale imitation.

With an upswing in lawsuits against plan sponsors and fiduciaries for breaches of fiduciary duty, there has certainly been a growth in the use of ERISA §3(21) and ERISA §3(38) fiduciaries who will either share in the fiduciary responsibility (§3(21) or assume it all together (§3(38)). In order to cash in on this growth, a number of bundled plan providers have decided to cash in on this hoopla by offering a “fiduciary guarantee.”

 When you hear the words “fiduciary guarantee”, I assume most plan sponsors think that these plan providers will indemnify the plan sponsor in any lawsuits brought by plan participants for a claim for a breach of fiduciary duty.

A financial advisor forwarded me one of these guarantees for my thoughts. While the language on the guarantee was pretty clear, I am an ERISA attorney for 13 years and I know the tricks of the trade. A plan sponsor who in most of these situations isn’t working with an ERISA attorney assumes that the plan provider will indemnify the plan fiduciaries in any alleged ERISA §404(c) breach in a participant directed retirement plan. The guarantee only states that the investment options that this provider selected was prudent, satisfied the Section 404(c) requirement of offering a “broad range of investment alternatives”, and that the investment strategies provide a suitable basis for plan participants to construct well diversified portfolios. Sounds like a great guarantee? Actually, I don’t think that the guarantee is worth the paper that it’s written on.

That whole broad range requirement is rather broad, I am unaware of any plan fiduciaries ever being sued on that requirement. To comply with the simple broad range requirement, the plan fiduciaries must first decide on the asset classes (e.g., stocks and bonds) and styles (e.g., large cap U.S. equity growth fund, small cap U.S. equity value) for the “core” investments of the plan.

While this bundled provider state that the investments offered are consistent with the fiduciary standard, the plan’s investment fiduciaries still must monitor the investment options to insure that each continues to meet the criteria for the asset class and style and is performing well enough to continue to be offered to the participants.

Guaranteeing that the investments offered in the plan are part of a broad range of investments and are prudent, these are only a couple of ways where a plan fiduciary can be sued for an ERISA Section §404(c) breach. A plan sponsor and fiduciary can still be sued for not formulating an investment policy statement or offering investment education to plan participants. There are thousands of mutual funds out there, it’s not so hard to find five funds that make that broad range requirement or a claim that the investments are prudent.

A fiduciary guarantee is almost absolutely no protection for plan fiduciaries, it’s like buying car insurance that only covers you in a head on collision or a life insurance policy that only pays on accidental death. The fiduciary guarantee is no substitute for an ERISA §3(21) or ERISA §3(38) fiduciary. Unless a bundled provider assumes some sort of fiduciary capacity, the plan sponsor as a plan fiduciary is not being protected.

Don’t be had by a pale imitation, only go for real fiduciaries and real fiduciary protection.

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3 Responses to ERISA Fiduciaries: Ain’t Nothing Like The Real Thing

  1. Joe Waters says:

    Great Article Ary, can you refer me to any bundled plan providers that offer the type of protection you suggest. I have read Principal literature and to me, just a finacial advisor, it seems as though it covers what you suggest

    • admin says:

      if a bundled provider is using an outside 3(38) or 3(21) or accepting the role of fidcuairy by themselves, then those are the ones to consider.

  2. Excellent article, right to the point. Is still amazes me that plan fiduciaries do very little due diligence on the selection of the advisor 3(21) or 3(38) and almost never ask for evidence of affirmative fiduciary coverage. Then again only about 12% of plans carry first party fiduciary insurance so why am I surprised?

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