Retirement Realities: ERISA Fiduciary – The Family Similarities

As I sit outside, enjoying a beautiful day with my family, I realize the similarities between serving in a fiduciary capacity and being a parent. As a fiduciary under ERISA, a rep-advisor has the opportunity to provide advice and guidance to a plan sponsor that may or may not be composed of individuals that are experienced with investments. Similarly, I have the opportunity to provide guidance and advice to my two little girls and new son as they grow and become more independent with the decisions they are able to make.

It is my responsibility as a parent to present reasonable options to them, so regardless of the decision they make, they have sufficient information to make a good decision. Similarly, an advisor to a retirement plan that is providing non-discretionary fiduciary advice (i.e. the plan sponsor will make the ultimate decision) will present options for recommended investments to include in the plan. The advisor most likely would not have included the fund in a recommended list unless they first believed it would be reasonable for the plan to choose that option.

In reality, the decisions my children will have to make will be much simpler, such as whether or not they want to go to the children’s museum or to the zoo. However, providing them with options and letting them know the pros and cons of each (one is inside, the other outside) will help them start to make decisions in the future. My job is to guide them down the right path.

Of course, there are other family members that may just want to rely on you to make the decisions for them. Have your parents or grandparents asked you to take over responsibility of their finances as they grow older and want to have less responsibility? My mom and uncle took control over my grandpa’s finances because it was easier for them to ensure that all his bills were paid and he trusted that, as fiduciaries, they would ensure good decisions were made on his behalf. He, of course, reviewed his check book periodically to ensure the decisions they were making were prudent.

At a basic level, my role as a parent is similar to an advisor providing services as a fiduciary under ERISA Section 3(21). Similarly, when my mom and uncle took over discretionary control of my grandpa’s assets and made decisions on his behalf, they were acting in a capacity that could be compared to an Investment Manager under Section 3(38). An investment advisor, as described in Section 3(21), provides advice about securities and investments. The plan sponsor will then make the decision about what investments are included in the plan line-up. The plan sponsor will rely on you, the advisor, for guidance and advice about the mutual funds and why they should, or should not be included. As an Investment Manager, as described in section 3(38), you would have the discretion to make decisions on behalf of the plan. A retirement plan committee may decide they do not have the time or relevant experience to make individual decisions about each investment, but would prefer to hire the advisor as an Investment Manager.

Of course, the similarities to family and fiduciaries may end there. The plan sponsor will have more experience and decision-making authority than any of my children. They will also be able to decide what type of advisor would work best for their specific situation. The important thing for you as a rep-advisor is to understand the different fiduciary and non-fiduciary services and then decide how the different levels of service may fit into your retirement plan practice.

Please share your thoughts and questions! We will also be posting a series of Retirement Center bulletins that outline more specific examples of services covered, and paperwork required when providing fiduciary advice under Section 3(21) and 3(38) over the upcoming weeks.

~Colleen