DCIIA Publishes Guide to Fiduciary Models

The Defined Contribution Institutional Investment Association published this month a governance model guide for plan sponsors, “Defined Contribution Plan Governance Models: A Guide for Plan Sponsors.” The guide outlines governance and fiduciary structures that plan sponsors can elect to fit their plan’s needs.

The guide describes the different service providers a plan can turn to and in what situations those providers would be fiduciaries. The names for the fiduciary types come from sections of the Employee Retirement Income Security Act: 3(16), 3(21) and 3(38) fiduciaries.

3(16) Fiduciary

A 3(16) fiduciary is a plan administrator acting in a fiduciary capacity. Not all administrative tasks bring fiduciary status.

Examples of administrative tasks that are fiduciary tasks include: discretionary authority on matters of ERISA compliance; moving balances or implementing trades; discretionary authority on loans and hardship withdrawals; and writing checks.

Other tasks would not automatically make an administrator a fiduciary, such as: enrolling participants; financial education support; implementing trades by direction and not discretion; and ordinary cleric duties.

A key distinction among 3(16) actors is whether they have discretion or are directed to perform a task, according to the guide. For example, if the sponsor outsources final judgement on authorizing a hardship withdrawal, then that administrator is acting as a fiduciary. However, if an administrator is merely assisting in eligibility determination based on guidelines established by the sponsor, then it is not acting in a fiduciary capacity.

3(21) Fiduciary

3(21) fiduciaries are investment advisers or consultants. The guide says that hiring an adviser can be a good choice, even if the plan sponsor has in-house experts, since it can add another set of eyes and additional analysis.

This class of fiduciary gives advice to a plan but leaves final decision making to the sponsor. 3(21) fiduciaries can provide data related to and can recommend changes to policy and governance structure, investment selection, fee structure, administration and asset custody.

The guide warns sponsors to watch out for conflicts of interest, especially in the form of advisers recommending their own products.

3(38) Fiduciary

3(38) fiduciaries are investment managers or outsourced chief investment officers. Working with a manager can take different forms, depending on the needs of the plan.

A manager can recommend certain parameters for investment options, such as the number that are actively or passively managed and the number of investments in each assets class. The sponsor would then fill those parameters, or “buckets.” A manager can also be more involved in the process, such as by selecting asset allocation and glidepaths for a custom target-date fund.

This category of fiduciary is most popular outside of defined contribution plans, such as in defined benefit plans and endowments, but its popularity is growing in DC plans, according to the guide. In the DC space, 3(38) fiduciaries are primarily used for TDF and single-manager fund selection.