Today, the choices we make come with concerns that carry far greater consequences than what flavor of ice cream. For example, consider the process of selecting a fiduciary. (Photo: Shutterstock)
As we enter the Dog Days of summer, traditionally the hottest time of the year, all minds turn to one thing: ice cream. What's your favorite flavor? Chocolate or vanilla? Black raspberry or pistachio? And would you like chocolate or rainbow sprinkles?
Growing up, those represented our exciting (and sometimes overwhelming) choices. And maybe our greatest worry was eating that ice cream fast enough so it wouldn't melt and drip on the hot pavement that burned our bare feet.
Related: 3 tips for improving your retirement plan's fiduciary file
|What flavor of fiduciary would you like? Know your options
Ah, life seems much simpler then. Today, our options come with far more ominous concerns, concerns that carry far greater consequences (though, in many ways, ones that still hold our feet to the fire). For example, consider the process of selecting a fiduciary.
We all know 401(k) plan sponsors are better served by hiring a fiduciary, but not all fiduciaries are alike (see "What's the Difference Between 3(38) and 3(21) 401k Advisers?" FiduciaryNews.com, August 6, 2019).
It's not that one is automatically better than the other. Both 3(38) and 3(21) share the same fiduciary standard. Both require the adviser to assume a fiduciary role. Both limit the types of service provider that can fill the function.
But they also represent a distinction with a difference.
The best way to metaphorically describe this difference is by asking the question: "Would you rather have a co-pilot or ride First Class?"
|The 3(21) fiduciary
Think about what hiring a co-fiduciary 3(21) means from an operational perspective. It places the 401(k) plan sponsor and the 3(21) on equal terms. Neither makes a decision without the other. It's like they're both co-piloting the plane. They're both held accountable for safe takeoffs and safe landings, as well as keeping the vehicle in the air. A mistake by one puts the other at professional risk.
Inherent in this arrangement, each party has to place a lot of trust in the other party: The plan sponsor must trust the adviser to offer sound advice. The adviser must trust the plan sponsor to act dutifully on that advice.
If the plan sponsor loses faith in the 3(21) adviser, it's time to get another 3(21) adviser. If the 3(21) adviser feels the plan sponsor is acting outside the fiduciary comfort zone, it's time for the 3(21) adviser to unilaterally resign.
|The 3(38) fiduciary
While trust is also present in a 3(38) relationship, the nature of that trust is wholly different. If we go back to our airplane analogy we can see why.
In hiring a 3(38) fiduciary, the plan sponsor turns over the cockpit to the adviser. The plan sponsor, within the narrowly defined scope of the 3(38) relationship, then becomes just like any other passenger on the plane, although perhaps with more spacious and cushy seats.
The plan sponsor trusts the 3(38) adviser will have a minimal standard of competency at the controls. If that trust is broken, the plan sponsor can simply hire another 3(38) to pilot the plan.
Because the 3(38) adviser has full discretion, there is no need for reciprocating trust (other than the normal trust any vendor has that a client will honorably pay for services on a timely basis).
Unlike what happens in a 3(21) arrangement, the 3(38) adviser doesn't have to worry about a plan sponsor interfering with the fiduciary process. Thus there would be a diminished likelihood that a situation would arise where the 3(38) adviser would unilaterally resign.
Although they both come with the word "fiduciary" in their job description, it is this nature of the trust relationship that distinguishes 3(38) duties from 3(21) services.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
