ERISA 3(38) - Issues With Service Agreement

Client with about 50 employees in its 401(k) plan wants to change TPAs.  The new TPA (major insurance company) has suggested a third party ERISA 3(38) investment manager (major investment firm) to select and monitor investment options to be made available to participants. Big emphasis on how 3(38) allows fiduciaries to avoid or minimize their fiduciary liability.

Seems like a good idea until I read the service agreement with the 3(38) investment manager (“IM”) which states that:

1. Employer is responsible for determining that the investment lineup chosen by the IM is “appropriate for the plan”. Wait, isn’t that the IM’s job?

2. IM will indemnify the plan (but not the fiduciaries) against losses arising  from its breach of fiduciary duty, willful misconduct or breach of the agreement (but not from its negligence). First, you can’t sue the plan for a fiduciary’s breach of his fiduciary duty. Second, the whole point of 3(38) is to protect the plan fiduciaries, not the plan. Third, the IM should indemnify if the loss is attributable to its negligence.

3. The Employer and the plan indemnify the IM for any losses arising in connection with the services provided by the IM unless attributable its breach of fiduciary duty, willful misconduct or breach of the agreement. So, the Employer and the plan have to indemnify the IM for it losses even if those losses are due to the IM’s negligence.

Bottom line is that the Employer is not receiving the protection from statutory fiduciary liability that the marketing materials promised and, in fact, is assuming contractual liability to the very party that is supposed to assume that fiduciary liability.

Am I missing something?

All seems odd, especially the first one. The others may just be in there to see if you would catch it. Back to item 1, any chance they gave you a 3(21) contract in error?

Sorry - but I'm going to get on my soapbox on this one.  First, if *anyone* suggests that hiring another fiduciary relieves other fiduciaries of liability, RUN.  Don't walk.  Don't ask questions.  Just get the heck out of there.  The "co-fiduciary" liability thing is real, and the duty to monitor other fiduciaries is another fiduciary obligation that most plan sponsor centered fiduciaries do not understand.  While a 3(38) is an "exception" to some extent that does relieve other fiduciaries of the liability for investment decision making, those fiduciaries still have the obligation of prudently hiring, prudently monitoring, and prudently firing when appropriate.  That, in my (attorney-0litigious) mind means understanding their process, and ensuring they are following that process, and determining that that process is an appropriate process for their plan and it's participants/beneficiaries.

I would suggest entering into the agreement the OP posited itself would be a breach of their fiduciary duties.  It does, as Bill suggest, appear at least partially like it is a 3(21) agreement.  Lots of questions about the agreement.  Even more questions about the plan sponsor/fiduciaries to truly understand what they are getting into....

OK.  Soapbox put away (for now).

Well said MoJo. Fiduciary liability cannot be passed off like a bad check.

On 3/8/2021 at 8:46 AM, MoJo said:

First, if *anyone* suggests that hiring another fiduciary relieves other fiduciaries of liability, RUN.  Don't walk.  Don't ask questions.  Just get the heck out of there.  The "co-fiduciary" liability thing is real, and the duty to monitor other fiduciaries is another fiduciary obligation that most plan sponsor centered fiduciaries do not understand.