August 2014

Inside this issue:

ERISA 3(21) or 3(38) Fiduciary?

There is an increasing amount of discussion within the retirement plan industry regarding the potential benefits of hiring an investment expert who agrees to act in the capacity of an ERISA section 3(38) investment manager (or “3(38) fiduciary”). While this is an important topic, it can be confusing. Here is a brief summary of the subject:

What is an ERISA 3(21) Investment Advisor?

ERISA Section 3(21) defines several fiduciary roles, but when applied to an investment advisor, it refers to one who is paid to provide investment advice to a retirement plan. Very often this means that the advisor helps select, monitor and occasionally replace the investments offered in the 401(k) or 403(b) plan. A 3(21) investment advisor provides investment advice in a co-fiduciary capacity rather than exercising full discretionary power over investment decisions. In practice, this often means they make recommendations to the plan sponsor, who makes the final decision and signs off on the required investment contracts. An advantage of this approach is its flexibility, but the plan sponsor retains shared responsibility for investment decisions. Hiring a qualified ERISA 3(21) fiduciary should help address a plan sponsor’s investment oversight duties, as this adds required expertise to the investment monitoring process. The investment advisor shares fiduciary responsibility and liability with other plan fiduciaries (i.e., investment committee members, board members).

What is an ERISA 3(38) Investment Manager?

An ERISA 3(38) investment manager, on the other hand, is delegated full discretionary powers for the selection, monitoring and replacing of the plan’s investment options. If hiring a 3(21) investment advisor is similar to hiring someone to give you driving directions, hiring a 3(38) investment manager is like handing them the keys to the car. In hiring a 3(38) fiduciary advisor, plan fiduciaries (again, investment committees, board members, etc.) remove themselves from the ongoing investment decision-making process. Once an investment manager is appointed, the plan sponsor generally is no longer responsible for the delegated decisions. However, they must ensure that the investment manager was selected in a prudent manner and that they are supervised appropriately. For many plan sponsors, given the current climate of increasing regulatory scrutiny and litigation risk, the appeal of hiring an ERISA 3(38) investment manager is the ability to fully delegate the investment fiduciary role to an outside expert.

Which fiduciary approach is best?

We caution plan sponsors to discount some of the extreme claims being made regarding ERISA 3(38) investment management, but to consider the pros and cons carefully. They should first assess the level of responsibility and control they wish to maintain in the investment oversight process. Those seeking to minimize their own involvement, and its accompanying liability, may be well served by delegating to a qualified ERISA 3(38) investment manager. Those who prefer to retain final control over decisions and share fiduciary liability with an independent expert are probably better served by engaging a qualified ERISA 3(21) investment advisor.

Our experience at MRPA

Montgomery Retirement Plan Advisors and our sister company, Fidelis Fiduciary Management, serve as an ERISA 3(21) investment advisor for most of our clients and as a 3(38) investment manager for the rest, depending on their objectives and desired level of involvement. We also are one of only a handful of advisory firms to be CEFEX® certified specifically as ERISA 3(38) investment managers.

However, we also believe that the ERISA 3(38) approach is neither a panacea for all fiduciary issues nor the best fit for every plan sponsor. Our most important message to sponsors of retirement plans is this: If you do not consider yourself qualified to effectively conduct the required fiduciary due diligence processes on your own, engage an expert who can help you; and require that they stand behind their work by accepting, in writing, fiduciary responsibility for their work.

A Quick Look at Gap Analysis

Participant-directed retirement plans put the responsibility on the employee to make important decisions regarding their financial future. The obvious (and most important step) an employee can take when it comes to his or her retirement plan is to participate in the plan. But periodically, they need to review their saving and investing plans to determine if they are on track to meet their retirement income goals.

Until recently, the service provider community had yet to uncover a simple way of helping participants determine how much they should be saving to reach a sufficient post-retirement income. However, you may have already heard about an approach called “Gap Analysis”. This technique uses a participant's current contribution rate, account balance and salary, together with estimated Social Security payments and sponsor matching contributions, to determine whether the participant’s income at retirement will be sufficient to meet a specified replacement income percentage (typically 80%-90%; source: If a gap exists, the Gap Analysis service may propose a contribution percentage that will help minimize that gap. It also demonstrates the impact of working longer and making do with a lower replacement income assumption.

We all know that we can be saving a bit more for a worthy cause: our future financial well-being. Gap Analysis provides a bias for action among participants to help themselves become financially independent at retirement. To learn more about the Gap Analysis service(s) that may be available to your employees, check with your retirement plan provider.

Frequently Asked Question: Automatic Contribution Increase Feature

Question: Is it helpful to participants to add an automatic contribution increase feature to our retirement plan?

Answer: Definitely yes, according to analysis by Fidelity Investments.

For a participant in his or her mid-20s, a 1% contribution rate increase, which would be about $33 per month for an employee earning $40,000, could yield an extra $200 to $330 each month in retirement income. An additional $180 to $270 in monthly retirement income could be available to someone in his or her mid-30s earning $60,000. (The 1% increase in this case would be about $50 each month.)

One-third of all participant contribution percentage increases through the end of 2013 were attributed to the automatic increase feature, according to Fidelity’s research.

On average, only about 13% of employees opted out of automatic increases.

Given the potential for a boost in retirement income, adding this plan design component has the potential to be very helpful to participants.

Training for the World Cup Trophy

- David M. Montgomery, AIF®, CRPS

The 2014 FIFA World Cup concluded just a few weeks ago. Athletes from around the world have trained daily for most of their lives to reach the point of competing for this trophy. Even for the most physically gifted among them, it is safe to say that none simply woke up one day, and announced “I’d like to compete for the World Cup Trophy”, and miraculously were recruited by a world class team.

In the context of athletic goals, that approach sounds ridiculous, but sadly, many people treat their retirement planning that way. They think to themselves, “I’m going to be 65 years old in a couple years and that’s when you’re supposed to retire, so I’d like to do that”. Yet they have done little to prepare. They may have contributed some money off and on to their retirement plan or they may have even been consistent with contributing a smaller percentage of their pay over the years. However, that’s pretty much the same as someone exercising off and on or even consistently walking a few miles every day and hoping to be ready for the FIFA World Cup. Unfocused preparation can’t prepare an athlete for serious competition, and improperly training your finances will not prepare you for retirement.

Like the athlete training to win the World Cup, we have to train our finances to be prepared for retirement. The great news is that even though there can only be one team who wins the trophy, all of us can win at pursuing our retirement goals. We just have to follow some basic habits and stick to them.

You can increase your chances at reaching retirement confidently by simply applying “The Five Seeds of Investing Habits”:

Habit # 1: Expect Success -- Expect you’ll reach the retirement you want. Most successful people start each day expecting to succeed.

Habit # 2: Define your goals -- Set focused goals to help you pre-commit to a rational investment plan. It also gives you clarity, which frees you from emotional stresses caused by volatile markets.

Habit # 3: Base your current spending behavior on your investment goals -- Determine how much you need to save monthly to reach your retirement goals. If you aren’t saving that amount, then your current spending behavior isn’t in line with reaching the retirement you desire.

Habit # 4: Develop a plan and stick to it -- If you do this you’ll be like the World Cup Trophy winners who created their plan and consistently followed it in training. It was a key factor in helping them reach their goals, and it will help you reach your retirement goals.

Habit # 5: Take action, now! -- This is the simplest step of them all. However, behavioral finance principles indicate that lack of action is a top reason for failure to reach retirement objectives. Do this easy step now and you’ll be on your way to stepping out from the crowd.

Seeds of Investing

For a copy of this month’s Seeds of Investing newsletter, formatted for distribution to retirement plan participants, contact David Montgomery at or 813-868-1930.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

About Us  |Resources | Contact Us
©2014 Montgomery Retirement Plan Advisors, All Rights Reserved.

Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Other advisory services offered through Montgomery Retirement Plan Advisors, a separate entity.

Fidelis Fiduciary Management is not affiliated with LPL Financial.

The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: Florida, Texas, California, Nevada, Ohio, Tennessee.