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Choosing the Right Type of Investment Assistance

Posted By NIPA Headquarters, Tuesday, September 3, 2013

By Kimberly Shaw Elliott, Attorney at Law

(Last month, we examined the question of who is a 3(21) versus a 3(38) investment fiduciary. In this installment, we look at the three traditional models for how investments are delivered to retirement plans and when it is preferable for a plan sponsor to use each type. Next month, we will consider what due diligence measures can be followed in making that selection.)

Plan sponsors often need help selecting the investment options for a plan so they may wish to engage professional assistance. Choosing what type of help may seem like a confusing task. A TPA may bring extra value to a relationship by educating a plan sponsor about what types of guidance are available and what impact each type may have on the sponsor’s own fiduciary liability. 
There are three traditional models for delivering investments options to retirement plans: registered representatives, investment advisers and investment managers. Each arrangement offers a different level of service and protection to plan fiduciaries and different compensation rules apply to each model.

Registered Representative
A registered representative of a broker dealer provides investment education that assists the plan sponsor in making the investment choices for the plan. The plan sponsor retains full discretionary authority to select the plan investments and uses information gained from the registered representative to guide his or her own decisions. Since no investment advice is given and no investment authority is granted, the registered representative is not a plan fiduciary and is not held to a fiduciary standard of care. He or she is not bound to avoid conflicts of interest.

Since a registered representative is not a fiduciary, he or she may receive commissions and other charges assessed against each transaction, whether a buy or a sell. These commissions may vary, based upon the investment choices actually made. Revenue sharing is permissible and is a means to compensate the registered representative for continuing to service an account after the original commissions have been earned.

Investment Adviser
An investment adviser representative (IAR) delivers services on behalf of a registered investment adviser. As we learned last month, an IAR gives investment advice and is a fiduciary as defined in Section 3(21) of ERISA and under the Investment Advisers Act. When using a 3(21) investment adviser, the plan sponsor retains investment authority but uses the recommendations made by the adviser when selecting the investments. The plan sponsor and the adviser, therefore, share the fiduciary responsibility with the sponsor.

An investment adviser receives an annualized fee, based upon the value of the assets in the program. This level fee is payable each period, regardless of the number of transactions actually processed. Because advisers give investment advice, they are fiduciaries to the plans. As such, their compensation cannot vary with the investments selected because it would be considered a conflict of interest to use a fiduciary position to influence one’s own compensation. The conflict is removed if the compensation remains level, regardless of what investment is selected.

Investment Manager
Finally, sponsors might also select an investment adviser and grant that adviser discretionary authority to make the plan investments him or herself. If the plan sponsor properly appoints and monitors the activity of an investment manager, as defined in Section 3(38) of ERISA, the sponsor can be relieved of fiduciary responsibility for the investment choices made by the manager. The properly appointed investment manager bears the fiduciary responsibility alone.

Since a 3(38) investment manager exercises investment discretion, it is a fiduciary and follows the same level compensation scheme as a 3(21) investment adviser, described above.

How to Choose?
A plan sponsor, in considering what type of assistance to seek, must assess his or her own comfort level and skills and select the distribution model that best fits his or her own needs.

  • Registered Representative: Choose this delivery method if the sponsor is confident about making all the investment decisions, with the help of information from a professional, and having sole responsibility for those decisions.
  • Investment Adviser: This is a good choice for the sponsor who wants to retain the decision-making authority but needs some guidance and specific investment recommendations. The sponsor may want someone else to bear part of the investment responsibility. He or she must be prepared to pay a fee every year, regardless of how the investments perform.
  • Investment Manager: This option provides the most protection to the plan sponsor because it also involves the most relinquishment of control. This is not for the do-it-yourselfer. 

Here is a summary of the attributes of each model:


Kim Shaw Elliott is a partner at Roberts Elliott, LLP, specializing in retirement investment law. She helps clients integrate the complex rules founded in ERISA/employee benefits, securities law, broker dealer regulation, insurance and tax into actionable advice. Contact her at (618) 223-1479 or

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