The Advantages And Disadvantages Of Hiring A 3(21) 401(k) Retirement Plan Adviser


Are you responsible for keeping the wheels rolling on your company’s 401(k) plan? It’s probably not your main job, and that’s the problem.

Supersize firms can afford to hire dedicated staff to manage and administer their 401(k) plan. You can’t. And if it’s your own firm, you may not want to.

You may prefer keeping things small and manageable.

In fact, when it comes to your 401(k) plan, there’s a popular solution that allows you to benefit from professional expertise while still keeping your hands on the wheel.

It’s called a 3(21) adviser.

“A 3(21) investment provider has limited fiduciary liability and investment responsibility on a retirement plan (sharing it with the plan sponsor);” says Deborah Castellani, a Senior Fiduciary Strategist and Sales Trainer at Akros Fiduciary Management in Austin, Texas.

You might not know the precise details of the code where “3(21)” comes from. You should, however, be familiar with the advantages and disadvantages of hiring a 3(21) adviser for your company’s retirement plan.

Advantages of hiring a 3(21) adviser:

Lower costs. Because the plan sponsor retains responsibility for the plan, 3(21) advisers take on limited duties compared to other service providers. This often leads to a lower cost “in a market where plan costs are heavily scrutinized,” says Anna Dunn Tabke, Principal at Alpha Capital Management in Atlanta.

Greater control. Plan sponsors “may want a say-so in the investments offered to employees and they may prefer having control over the change of funds,” says Dr. Guy Baker, Ph.D, founder of Wealth Teams Alliance in Irvine, California.

With a 3(21) adviser, control is shared. In fact, the plan sponsor retains veto power over all decisions. “A 3(21) might feel strongly about a specific fund and make a sound argument for the addition/removal of the fund, but they must rely on the plan sponsor to take action,” says Ryan Barnett, VP of Retirement Services at Heritage Retirement Plan Advisors, Oklahoma City.

The 3(21) adviser, in effect, merely makes suggestions. The plan sponsor continues to act as the ultimate decision maker. This then permits better coordination with company goals and strategies, since this is an area the plan sponsor is most familiar with.

Ultimately, the buck still stops with the plan sponsor. For some, this advantage cannot be understated. These individuals “prefer to take responsibility for the total management of the plan,” says Baker.

All these advantages are likely responsible for the initial and ongoing popularity of retaining 3(21) advisers. But, as with all things, these advantages come at a price.

Disadvantages of hiring a 3(21) adviser:

Greater fiduciary liability. This is the cost of staying in control. The 3(21) adviser only acts as a co-fiduciary. As a result, the plan sponsor retains nearly the same fiduciary liability with or without having a 3(21) adviser.

Delayed decision making. The 3(21) adviser only makes investment recommendations. The decision stays with the plan sponsor. This process may cause delays in implementing those recommendations, and that delay may expose plan participants to potential downside they might not otherwise be exposed to.

Retaining control also allows temptation to sneak in. It’s too easy for a plan sponsor to place corporate interests ahead of employee best interests. This may not be intentional or malicious, but it is a possible conflict-of-interest that most plan sponsors wouldn’t tolerate in their service providers.

Finally, not fully delegating investment duties requires the plan sponsor to have the time to manage the manager. This includes crafting and monitoring the plan’s Investment Policy Statement as well as scheduling and attending meetings with all the relevant parties “A 3(21) or a non-fiduciary investment provider may not ask for the same dedication to scheduled formal meetings,” says Castellani.

For many, the advantages far outweigh the disadvantages. When the disadvantages become overbearing, the plan sponsor must look into alternative arrangements.

The first thing they’ll discover is the need to relinquish control.

And that’s not a small thing.

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