One thing you can say for sure about the 401(k) business, it’s responsive to the needs of the marketplace.

Since the beginning of 401(k) plans in the early 1980s, 401(k) service providers have introduced an increasing number of services to stay competitive with other providers. We’ve seen the proliferation of such features as:

  • Daily valuation
  • Loans
  • Self-directed brokerage accounts
  • Web access
  • Investment education tools
  • Multi-share classes
  • Index funds
  • ETFs 
  • Target maturity funds
  • Participant Investment advice

Now with the increased focus by the Department of Labor on the fiduciary aspects of 401(k) plans, the market place has responded. 401(k) providers offer services allowing fiduciaries to delegate some or all of their responsibility for plan investments. But as the headline says, some fiduciary services are more equal than others.

So here is a brief description of the services available in the order of lowest to highest fiduciary protection:

  1. Due Diligence Support. Employers use the provider’s evaluation process with regard to the available investment options. It’s usually known as due diligence support. Employers use this tool to help construct an appropriate line-up for their plan, but they are still responsible for selecting and monitoring the plan investment options.
  2. Fiduciary Certificate or Warranty. Employers receive a Certificate or Warranty generally available to plan sponsors if they select at least one fund from the provider’s lineup in designated asset classes. In addition to due diligence support for evaluating their funds, employers have last-resort fiduciary liability protection if numerous conditions are met.
  3. Acknowledgment as a Fiduciary under Section 3(21)(A)(ii) of ERISA. An independent registered investment advisor (RIA) agrees to become an investment advice fiduciary under section 3(21)(A)(ii). The RIA recommends and monitors funds for the plan’s fund menu. However, employers are still responsible for selecting and monitoring funds on the menu.
  4. Acknowledgment as a Fiduciary under Section 3(38) of ERISA. As in #3 above, employers use the services of an RIA. But with this service, the RIA agrees to become an investment advisor fiduciary under Section 3(38) of ERISA.  A Section 3(38) arrangement t represents the most comprehensive level of fiduciary support possible under ERISA since the RIA assumes all responsibility for selecting and monitoring the funds.

Which one is best is a decision that each fiduciary has to make based on his/her individual facts and circumstances. But remember, all fiduciary responsibilities cannot be delegated away. The responsibility remains to monitor the service provider on a periodic basis.