Legal Blog

Time for Spring Cleaning: Limit Your Legal Exposure as a 401(k) Fiduciary By Hiring an Investment Manager

A Plan Administrator that is a fiduciary for a 401(k) pension plan has a bull’s eye on its back.   Under ERISA, the federal statute that governs group pension plans, a plan fiduciary such as a Plan Administrator is required to make prudent investments and monitor investments to make sure investments that don’t measure up are removed.

But a Plan Administrator or other fiduciary who under federal law is held to a fiduciary standard is a target if it fails to manage and monitor investments wisely.  Last August, a class action on behalf of 24,000 faculty and staff members was filed against the Johns Hopkins University retirement plan.  The suit charges that plan trustees violated their fiduciary duties to Plan participants by choosing investment funds that charge excessive fees for administrative and investment services.  Similar lawsuits were filed against other universities, including MIT, New York University, Yale, Duke and Vanderbilt.

Can Plan Administrators, Plan Sponsors and Plans fight back?  Yes, if the Plan hires a §3(38) Investment Manager.  To do so, a Plan that does not have such an Investment Manager must find a person or entity willing to serve as an Investment Manager and must revise its Plan documents to reflect the fact that in the future investment decisions will be made by the Investment Manager pursuant to §3(38).   ERISA §3(38) allows a Plan Sponsor to appoint an Investment Manager to manage a Plan’s investments.  Only a registered investment advisor, bank or insurance company may accept appointment as an Investment Manager.  The agreement between the Plan Sponsor and the Investment Manager must be in writing.  And, the Investment Manager must acknowledge its fiduciary status in writing.

Under the §3(38) Plan, the Investment Manager undertakes sole discretionary authority to select, monitor and replace investment options for the 401(k) retirement plan.  The Plan Sponsor and Plan Administrator are relieved of the responsibility for the Investment Manager’s investment decisions.  The Plan Sponsor/Administrator does retain an important fiduciary duty—to prudently select and monitor the Investment Manager. 

Under the §3(38) Plan, the Investment Manager undertakes sole discretionary authority to select, monitor and replace investment options for the 401(k) retirement plan.  The Plan Sponsor and Plan Administrator are relieved of the responsibility for the Investment Manager’s investment decisions.  The Plan Sponsor/Administrator does retain an important fiduciary duty—to prudently select and monitor the Investment Manager. 

 

If your company or individual trustees are the responsible fiduciary for making 401(k) investment decisions, you should consider converting to a §3(38) Plan to avoid lawsuits for breach of fiduciary duty for failure properly to select, monitor and replace 401(k) investment options   As part of my practice, I advise pension plans and their trustees on §3(38) Plans.  If you have a question, call me at 240.507.1725.

 

 

ABOUT THEODORE P. STEIN

tstein@offitkurman.com | 240.507.1725

Theodore P. Stein is an attorney based in Bethesda with more than 30 years of experience who counsels employers, their plans and plan trustees on how to comply with ERISA and the ACA and how to minimize the risk of ERISA claims.  He also represents them when litigation is threatened or filed.  He is the Chair of the ERISA/Employee Benefits Practice and a Principal in the firm’s Labor and Employment Practice Group.

 

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 130 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our ten offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

 

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