When an employer decides to offer a retirement plan such as a 401(k) to its workers, the plan is regulated under the Employee Retirement Security Act of 1974. As the plan sponsor, the employer is legally required to select, monitor and sometimes replace a menu of investment options for the plan participants. However, plan sponsors often lack the skills required to properly discharge this obligation. In this situation, ERISA rules require that the plan sponsor retain the services of a fiduciary.
3(21) Fiduciary Role and Responsibilities
An ERISA 3(21) fiduciary is an individual or institution obligated to provide to a plan sponsor investment advice that is in the best interests of the sponsor and plan participants. The 3(21) fiduciary may be a registered investment adviser, a bank or an insurance company. Such fiduciaries do not assume legal liability in the event a plan sponsor is sued by plan participants. The fiduciary role is to furnish expert advice and recommendations regarding the retirement plan. Essentially, the fiduciary evaluates investments to ensure they are prudently chosen and that the financial institution providing the plan is not charging unreasonable fees. A 3(21) fiduciary does not exercise discretion, meaning the fiduciary’s role is only that of adviser. The plan sponsor retains the power to make changes in the retirement plan investments and remains legally responsible and liable.