ERISA consultants at the Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Tennessee is representative of a question we commonly receive related to plan fiduciaries. The advisor asked:
“How does a plan sponsor properly engage an ERISA 3(38) investment manager?”
Highlights of Discussion
- There are several requirements with respect to the engagement of an ERISA 3(38) investment manager that a plan’s named fiduciary must satisfy in order to avail itself of the fiduciary liability protection that an ERISA 3(38) investment manager can provide.
- Under ERISA, a plan’s named fiduciary (e.g., plan sponsor) is authorized to appoint an investment manager who will have responsibility for all investment matters, including the power to acquire and dispose of plan assets. (ERISA Section 402(c)(3))
- If the named fiduciary of the plan properly appoints an ERISA 3(38) investment manager and continues to monitored such individual or entity, then the plan trustee, the party that typically has direct responsibility for managing plan assets, will not be liable for the acts or omissions of the investment manager and will not be required to invest or otherwise manage any asset of the plan which is subject to the authority of the investment manager. (ERISA §405(d)(1))
- In order for an individual or entity to be considered an ERISA 3(38) investment manager, the person or entity must:
1. be formally appointed and monitored by a named fiduciary of the plan;
2. have the power to manage, acquire or dispose of any asset of the plan;
3. be a registered investment adviser (RIA) under federal or state law, a bank as defined under the Investment Advisers Act of 1940, or an insurance company that is qualified to perform investment services under the laws of more than one state; and
4. acknowledge in writing that it is a fiduciary with respect to the plan.
- If a plan uses the services of a person who does not satisfy all of the above criteria, then the appointing fiduciary is not relieved of fiduciary responsibility, and will remain liable for the acts or omissions of the investment manager (see Whitfield v. Cohen, 682 F.Supp. 188 (S.D.N.Y. 1988)).
- The Whitfield decision established the elements necessary for the prudent selection of a person or entity to invest ERISA plan assets. These considerations require the trustee to:
1. evaluate the person's qualifications including experience, education, registrations and past performance;
2. ascertain the reasonableness of fees;
3. review documents reflecting the relationship to be entered into; and
4. ensure adequate, periodic accountings in the future.
Conclusion
Following the proper procedure in selecting and monitoring an ERISA §3(38) investment manager is vital to ensuring the named plan fiduciary will not be liable for the acts or omissions of the investment manager.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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© 2015 Columbia Management Investment Advisers, LLC. Used with permission.
