A Sleeping Committee, Revenue Sharing, and a 3(21) Advisor
Cedar Point Health (180 employees) sponsors a 401(k). The plan committee is the CFO, the HR director, and the owner. In 2023 the committee retained Larch Wealth under a §3(21) agreement; the recordkeeper pays Larch 25 basis points from plan assets. The committee has not met since 2023 and has never reviewed the fund line-up. The plan's large-cap fund has a 1.35% expense ratio; an index fund tracking the same index is available at 0.05%. The CFO wants to use $40,000 of plan assets to pay for a fiduciary training session for himself and to reimburse the owner $12,000 for 60 hours of plan work. A participant asks why her account lost 12% in 2022 while the S&P 500 lost 18%.
1. Identify the fiduciary breaches and prohibited transaction risks in the committee's conduct and the CFO's proposals.
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The committee's two-year failure to meet and its failure to review the fund line-up and fees are breaches of the §404(a)(1) duties of prudence and loyalty and the duty to monitor. The 25 basis point payment to a §3(21) advisor must be reasonable, disclosed under §408(b)(2), and monitored; revenue sharing does not have to be eliminated, but it cannot be ignored. The 1.35% fund versus a 0.05% index fund is not automatically imprudent, but the absence of any documented review makes it difficult to defend.
The CFO's $40,000 training request depends on purpose. If the training is genuinely for plan administration and benefits the plan, it may be a reasonable plan expense; if it is personal credentialing or employer benefit, paying from plan assets is a prohibited transfer under §406(a)(1)(D) and a breach. The $12,000 reimbursement to the owner raises §406(b) self-dealing and §408(c)(2) issues: reasonable compensation for necessary services may be permissible, but it must be documented, not excessive, and not a disguised distribution. The committee should adopt written procedures, obtain independent pricing, and document every decision.
2. How would converting Larch to a §3(38) investment manager change the committee's responsibilities, and what must the committee still do?
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A §3(38) investment manager must be a bank, insurance company, or registered investment adviser that acknowledges fiduciary status in writing and has discretion to select and manage plan investments. If Larch is properly appointed as a §3(38), the committee is relieved of liability for individual investment decisions made by Larch, but it is not relieved of its duty to prudently select and monitor Larch. The committee must review Larch's qualifications, the scope of its discretion, its fees, and its performance at reasonable intervals, and must remove Larch if it is not performing prudently.
By contrast, a §3(21) adviser is a co-fiduciary who makes recommendations; the committee retains final decision-making authority and remains responsible for the investments it selects. Re-papering as a §3(38) does not eliminate the committee's oversight, and the committee should confirm that Larch's acknowledgment, the plan document, and the service agreement all support the §3(38) appointment. The committee should also address the revenue-sharing arrangement and whether Larch will act as a fiduciary with respect to the fund menu and share classes.
3. Does §404(c) protect the plan from the participant's 2022 loss complaint? What should the committee do?
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Section 404(c) provides limited relief from fiduciary liability for losses that result from a participant's exercise of control over her own account, but only if the plan satisfies the regulation's conditions: the plan must permit participants to direct investments, offer a broad and diversified menu, provide the required §404a-5 disclosures, and actually allow the participant to exercise control. Even with a valid §404(c) plan, fiduciaries remain liable for the prudent selection and monitoring of the menu, the reasonableness of fees, and the selection of default investments.
A 12% loss while the S&P 500 lost 18% is not evidence of a breach; the participant's own asset allocation, diversification, and timing matter. The committee should review the fund menu, document its review process, confirm that disclosures were provided, and respond to the participant in writing. It should also consider whether the plan's investment policy statement, education program, and default fund are adequate. If the plan cannot demonstrate §404(c) compliance, the committee should correct the deficiencies prospectively.