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Anatomy of a No-Brainer

Scott Simon of Prudent Investor Advisors argues the case for plan sponsors hiring a 3(38) fiduciary.

W. Scott Simon, 04/03/2014

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

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The phrase "3(38) vs. 3(21)" is often bandied about in the investment advisory profession. Its use is usually meant to delineate the difference between a discretionary investment fiduciary decision-maker (pursuant to section 3(21)(A)(i) of the Employee Retirement Income Security Act of 1974 (ERISA)) and a non-discretionary investment fiduciary advice-giver (pursuant to ERISA section 3(21)(A)(ii)).

Discretion is the lynchpin that separates the two kinds of fiduciaries; the former has it and the latter doesn't. This seemingly small distinction can often mean a world of difference in retirement plans with respect to legally protecting plan fiduciaries as well as providing low-cost and well-diversified investment options to plan participants (and their beneficiaries).

But what if instead of "3(38) vs. 3(21)," a discretionary investment fiduciary decision-maker teams up with a non-discretionary investment fiduciary advice-giver? That is, instead of a 3(38) vs. 3(21) face-off, what about a "3(38) and 3(21)" team?

In the 3(38) and 3(21) team scenario, the former protects plan fiduciaries and provides plan participants with a menu of prudent investment options. The latter can provide plan participants with legally meaningful and objective investment advice.

The following memorandum is an example that explores the benefits of a 3(38) and 3(21) team versus a Big Insurance Company/Big Brokerage Firm/Big Consulting Firm team as they vie for the hand of a 401(k) plan. 

The Players
The COOL team is composed of 1) COOL: a registered investment advisory firm and a non-discretionary ERISA fiduciary and 2) Prudent Investor Advisors: a registered investment advisory firm and a discretionary ERISA fiduciary. The Big Brokerage Firm team is comprised of 1) a Big Brokerage Firm (not any kind of fiduciary), 2) a Big Insurance Company (not any kind of fiduciary), and 3) a Big Consulting Firm (a non-discretionary ERISA fiduciary). The retirement plan is the XYZ 401(k) Plan, a relatively small plan that has been serviced by the Big Brokerage Firm team for a number of years.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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