Sponsors need to know several things when considering the type of advisor to hire. (Photo: Shutterstock)

The House of Representatives recently passed legislation that would make it easier for small companies to offer retirement plans —and that means a new wave of business owners, finance executives and HR managers will soon be learning about the nuances between 3(38) and 3(21) fiduciary services.

The House legislation, called the Secure Act, includes a provision to simplify the process for small businesses to band together and offer defined contribution plans. It also opens the door for part-time workers to become eligible for retirement benefits.

Improving access to retirement plans is a pressing issue for our country, especially for employees working at small businesses. The Bureau of Labor Statistics estimates that 36 percent of full-time employees at companies with fewer than 50 workers are enrolled in a retirement plan. That number drops to 23 percent for part-time employees. Overall, 71 percent of non-government workers have access to a retirement plan, but only 55 percent participate.

With new legislation on track to become law, more workers than ever before will have an opportunity to save for retirement. Here are three tips for sponsors to work with retirement plan advisors to create a plan that best meets the needs of their most valuable resource – their employees.

1. Know the different advisor responsibilities

Under the Employee Retirement Income Security Act (ERISA), retirement plan advisors generally fall under two categories: 3(21) advisor and 3(38) investment manager. The main difference is the fiduciary role of the advisor.

A 3(21) advisor, for example, can provide plan sponsors with a list of funds, make recommendations as to which funds to use and document processes. A 3(21) advisor, however, does not have discretion (the ability to make choices) on plan investments. The plan sponsor acts in a fiduciary role by selecting investment options for the company.

A 3(38) investment manager, on the other hand, can perform the same functions as a 3(21) advisor, but can take it one step further. A 3(38) investment manager, as a fiduciary, has discretion, and the authority, to make investment decisions on behalf of your company.

2. Understand plan sponsor liability

ERISA requires that plan sponsors serve in a fiduciary capacity and always act in the best interests of participants. When working with a 3(21) advisor, plan sponsors share fiduciary duties with the advisor. The advisor can act as a co-fiduciary and recommend options for your retirement plan, but the plan sponsor is responsible – and liable – for fund selection.

A 3(38) investment manager assumes all fiduciary responsibility for fund selection and monitoring investments. Plan sponsors, though, aren't completely off the hook. They are still responsible for monitoring the manager's performance to ensure it meets the policies and procedures included in the plan's investment policy statement.

In our experience, most company executives responsible for retirement plans do not understand their obligation as a fiduciary. But the Department of Labor, which enforces ERISA, is spending more time scrutinizing retirement plans to make sure they are in compliance with federal law. Education, therefore, is critical to helping sponsors select the appropriate role the advisor will play in managing and administering the plan.

3. Evaluate company and participant needs

For plan sponsors who want to hand over control of selecting investment options for their employees – and the corresponding due diligence to evaluate fund suitability for participants – hiring a 3(38) investment manager is often the best option.

Establishing a company retirement plan, however, is more than just finding a partner to pick investment options. It involves picking the right type of plan (a 401(k) or SIMPLE IRA, for example), writing an investment policy statement, helping select qualified recordkeepers and third party administrators and overseeing quarterly investment committee meetings. While a 3(38) investment manager certainly can provide those services, so can most 3(21) advisors.

Launching and managing a company retirement plan is one of the most important decisions a company can make for its employees. Sponsors who correctly balance the resources of the company with the needs of their employees will have a win-win plan that helps participants save for retirement, while mitigating fiduciary risk.

Argent Retirement Plan Advisors, LLC is an SEC registered investment adviser. A copy of our current written disclosure discussing our advisory services and fees is available upon request. Please See Important Disclosure Information at https://argentfinancial.com/disclosure.

Ryan Barnett is vice president of Retirement Services for Argent / Heritage Retirement Plan Advisors, a Registered Investment Advisor with the SEC that specializes in providing fiduciary and investment advisory services to employer sponsored qualified and non-qualified retirement plans. Ryan has more than a decade of experience in the retirement plan industry as a legal and compliance specialist and plan advisor. Before joining Argent / Heritage, he worked for InvesTrust Retirement Specialists as the director of Retirement Services. Ryan received his bachelor's degree in business administration from the University of Oklahoma and his law degree from the University of Tulsa.

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