CPA & Business Advisory Blog

Retirerment 401k Statement

Can You Mitigate the Risk of Managing Your Company’s Retirement Plan?

Part 8 of Jim Sacher’s 12 Great Ideas for Tax Savings series

What to Look For

If you are an individual responsible for the management and oversight of your company’s retirement plan you must follow certain rules for operating the plan, handling the plan’s money and overseeing the management of the funds.

Plan fiduciaries have important responsibilities and are subject to certain standards of conduct because they act on behalf of the participants in the plan. These responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them
  • Carrying out their duties with skill, prudence and diligence
  • Following the plan documents
  • Diversifying plan investments
  • Paying only reasonable expenses of administering the plan and investing its assets
  • Avoiding conflicts of interest

Given the large sum of money invested in retirement plans and the potential shortfall in retirement savings for many American workers, the Department of Labor has become more aggressive in enforcing the rules governing qualified retirement plans, increasing fiduciary risk not only for the operation of the plan, but the investment management decisions as well.  As a business owner you are likely a trustee of your plan and not aware of your fiduciary responsibilities, and if you are risk-averse you are likely reluctant to take on the fiduciary responsibility for proper investment management and oversight.

The Opportunity

The Employee Retirement Income Security Act (ERISA) of 1974 provides that a plan sponsor can delegate the significant investment and management responsibility (and significant liability) of selecting, monitoring and managing of investments to an ERISA Section 3(38) fiduciary, a special kind of investment manager. Once a section 3(38) investment manager is properly named, the plan sponsor effectively hands over authority to the 3(38) fiduciary to make investment decisions and manage the assets of the plan.

A section 3(38) investment manager is a special type of fiduciary, one who has been specifically appointed to have full discretionary authority and control to make the actual investment decisions. The manager may select, monitor, remove and replace the investment options offered under the plan. Only certain types of financial institutions may be appointed as a 3(38) investment manager. The 3(38) must be a registered investment adviser, bank or insurance company and must acknowledge its fiduciary status in writing. It is important that service agreements be carefully drafted to provide for both the appointment of a 3(38) and for the acknowledgement of fiduciary status.

The Benefit

Hiring a 3(38) investment manager to manage the investment decision process is often the best way a plan sponsor can mitigate much of the liability associated with the investments offered to employees:

  • The 3(38) fiduciary assumes legal responsibility and liability for the decisions it makes, which enables the plan sponsor to better manage and mitigate their fiduciary risk for investment performance.
  • Relieves Plan Sponsors of the liability associated with selection and monitoring of investment choices. The 3(38) investment manager assumes full discretion of the assets and therefore take on full responsibility for the investment decisions in the plan.
  • Business owners still must select and evaluate the 3(38) investment manager and not intervene in the decision-making, allowing business owners to spend much more of their time managing the business and not the retirement plan investments.

As retirement plan sponsors increasingly seek out the services of investment managers for their retirement plans, it’s important that they understand the specific responsibilities assumed by these providers.  A properly structured investment management relationship, with the right organization, can relieve business owners of much of their investment responsibilities.

If you would like to have a conversation about minimizing your fiduciary risk through an ERISA review, or how you can take advantage of our tax savings ideas, please contact Jim Sacher at 440-605-7145 or jsacher@skodaminotti.com. Stay tuned for the next article in our series on creating a captive insurance company to better control insurance costs.


12 Great Ideas for Tax Savings

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