By: Paula Aven Gladych

Plan sponsors are increasingly looking for investment advisors who can shoulder some of the fiduciary burden related to offering employee retirement plans. More frequently they are turning to companies that offer fiduciary coverage under section 3(21)(A) of the Employee Retirement Income Security Act.

“There’s definitely an uptick in having an independent entity sign off as a fiduciary along with the plan sponsor,” said Chris Reagan, managing director and practice leader for Mesirow Financial’s Retirement Plan Advisory Group. The number of plan sponsors interested in such an advisor has increased as the number of class action lawsuits filed by plan participants against their retirement plans has risen, he added.

In February 2008, the U.S. Supreme Court ruled in LaRue v. De Wolff, Boberg & Associates, Inc. that plan participants may take action against plan sponsors. Many lawsuits followed, which has scared many advisors away from becoming fiduciaries, he said.

“If you are a plan sponsor and a fiduciary to the plan, you have a duty to act in the best interest of your participants,” Reagan said. “You need to be a prudent expert. If you are not, you need to go out and find that expertise. In today’s environment, a 3(21) investment fiduciary is another expert that a plan sponsor can lay off or share some responsibility and liability with.”

Under the Employee Retirement and Investment Security Act, section 3(21)(A) states that a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or he has any discretionary authority or discretionary responsibility in the administration of such plan.

“Not everyone in the marketplace will serve as a fiduciary. Some only act as a broker and won’t sign on as a fiduciary,” Reagan said. Most plan sponsors prefer 3(21) fiduciaries over 3(38) fiduciaries, he said. The difference between the two is that a 3(38) investment advisor “has discretion so they can act without really informing the plan sponsor. The plan sponsor has charged them with the duty to oversee the plan, whereas a 3(21) does not have discretion. They make recommendations but refer to the committee for final decisions,” he said.

Mesirow Financial acts as a 3(21) fiduciary for plan sponsors. “As a registered investment advisor and a fiduciary, we need to act in the best interest of a plan and its participants. Typically, we negotiate a fee upfront with our clients. We don’t work on a commission basis. We are not paid on product. It doesn’t matter to us who chooses what. It is all the same to us. What provider they are with, doesn’t matter. As long as we are working for the plan sponsor we are acting in the best interest of the plan,” Reagan said.

Transamerica Retirement Services announced in late October that it was partnering with the Investment Strategies group at Mesirow Financial to offer a new ERISA Section 3(21) fiduciary service to help retirement plan advisors and sponsors mitigate investment fiduciary risk.

As part of this service, Mesirow Financial is providing plan-level investment advice related to the selection and monitoring of the plan’s investment lineup. The company will act as an investment fiduciary to the plan along with the plan sponsor, who maintains ultimate control over the plan’s investment menu.

“We offered it both at the request of our plan sponsor clients and the schematic and trend in the industry to have somebody other than a plan sponsor to act as a fiduciary alongside plan sponsors,” said Jason Crane, senior vice president and national sales director for Transamerica Retirement Services. “Many of our distribution partners, our broker/dealer partners, allow their brokers to act in a fiduciary capacity. Many of our historic partners have chosen not to allow their advisors to act in a fiduciary capacity. In this instance, it acts as protection for our plan sponsors.”

Until the U.S. Department of Labor re-proposes its definition of “fiduciary” in 2012, many advisors are taking a wait-and-see attitude, Crane said. The partnership with Mesirow Financial is a “great offering for our clients who will not work in that capacity. [Mesirow] will review our portfolios and distill them down to an elite list. Those funds are scrubbed through Mesirow’s due diligence process.”

He added that the nice thing about the 3(21) service is that “Mesirow will defend any and all claims within its fiduciary duty.”

Transamerica’s financial advisors who have chosen not to act in a fiduciary capacity will remain “key contacts to our clients. They can help clients to mitigate their fiduciary risk without taking on a stated fiduciary capacity themselves. Our financial advisors can recommend a fund lineup using Mesirow’s elite list or they can suggest that a plan sponsor adopt one of three prefabricated portfolios constructed by Mesirow Financial based on the plan’s demographics,” Crane said. As long as a portfolio is constructed of Mesirow’s elite funds, the plan sponsor will get that additional fiduciary mitigation.

A July 2011 report by Diversified Investment Advisors predicted that by 2015, “advisors will no longer be in a position to receive compensation unless they assume ERISA Section 3(21) fiduciary responsibilities. This differs from the current regulatory framework, which allows plan sponsors to choose from other models, including broker/dealer, consultant and advisor models.”

The report, “Prescience 2015: Expert Opinions on the Future of Retirement Plans,” stated that the “need for ongoing holistic service from a third party is leading many plan sponsors to opt for a professional retirement plan advisor that services plans on a fee or retainer basis.”

Joe Masterson, Diversified senior vice president, said in a statement: “The emergence and organization of professional retirement plan advisors will have a profound impact on our business over the next five years. These professionals are dedicated to the retirement plans business, and therefore are well-suited to understanding plan compliance, designing appropriate fund arrays, positively impacting plan design and helping participants achieve funded retirements.”

David Wray, president of the Plan Sponsor Council of America, said that new rules regarding who is and isn’t a fiduciary will “clarify that the people helping shoulder the burden are actually doing it.” Most plan sponsors believe they have been getting that level of commitment from their advisors, he said. “Some plan sponsors would like to hire someone and actually have them make investment decisions for them and some want them to advise them on helping them make the decisions, but in both cases, the person helping the plan sponsor should be a fiduciary.”

Wray added that, “it’s best to have an advisor have their priority be the benefit of the participants rather than the interest of their employer.”