Retirement Plan: Top Ten Terms


As an advisor, we live and breathe the retirement plan world. All too often, we throw around the common acronyms and assume everyone understands the meaning and importance. To get you up to speed and launch the new year right, we’ve mapped out the top ten terms. (Remember, some regulations are more important than others, especially when it comes to fiduciary responsibility.)

ERISA – The Employee Retirement Income Security Act of 1974 regulates all employee benefit plans and promotes the interests of participants by establishing standards of conduct for plan fiduciaries. ERISA is enforced by the Department of Labor (DOL), the Internal Revenue Service, and the Pension Benefit Guaranty Corporation (PBGC).

408(b)2 – The section regulates fee and service disclosures to help retirement plan service providers better assess the reasonableness of the charges and make informed decisions. These disclosures include the description of plan services, fiduciary roles, and compensation details.

404(a)5 – The regulation requires retirement plan administrators to provide participants with clear and understandable information about plan fees and expenses, as well as investments. The plan sponsor must provide the required information to all eligible employees and beneficiaries before participants direct their investments and annually thereafter.

404(c) – Plan sponsors are protected from liability stemming from participant investment losses or poor return if they create a “safe harbor” under this section. There are three key plan sponsor requirements to help comply with 404(c) guidelines:

1. Ensure participants have adequate information to make informed investment decisions;
2. Offer a broad range of investment options; and
3. Allow participants independent control to move between investment options.

IPS – The Investment Policy Statement helps a plan fiduciary fulfill their investment duty by creating a framework for the investment decision-making process for employees. Having an IPS also protects fiduciaries from any passing investment fads, and is considered a best practice if a 401(k) plan is audited.

Plan Fiduciary – A plan fiduciary is anyone who exercises discretionary authority and discretionary control over the management or administration of the plan, plan assets or anyone who gives investment advice for a fee or other compensation related to plan assets.

3(21) – A 3(21) investment advisor can provide investment selection and monitoring advice. When a plan sponsor works with a 3(21), the employer is still responsible for selecting and monitoring the advisor, and for making all the final decisions regarding the investment options.

3(38) – ERISA allows plan fiduciaries to delegate responsibility for selecting, monitoring and replacing plan investments to a 3(38) investment manager. If the plan fiduciary prudently selects and monitors the 3(38) investment manager, they are not liable for any investment selection and monitoring decisions.

3(16) – A plan sponsor can outsource all fiduciary duties for plan administration by hiring a 3(16) plan administrator, however the employer is still responsible for selecting and monitoring the 3(16) plan administrator. The 3(16) coordinates communications among the plan, plan participants and government, and should not be confused with a plan’s third party administrator.

TPAs – Third Party Administrators are retirement plan design and compliance specialists. They do many of the functions performed by a 3(16) plan administrator, however, they do not have a 3(16) designation or any fiduciary status.

Don’t be afraid to ask questions or seek more information about any of these regulations or terminology. The jargon can be confusing and overwhelming!