Plan sponsors and retirement plan committees are likely to encounter a myriad of industry-related naming devices and designations. It is important that they understand what each means in terms of definition, background, and practical impact/importance to the plan, the plan’s fiduciaries, and the plan’s participants.
For instance, a number of ERISA sections are commonly used by plan service providers. ERISA stands for the Employee Retirement Income Security Act of 1974 and provides not only the rules that govern, in part, retirement plans but definitions as well. The following definitions are commonly used by service providers within the industry:
A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee or plan participant, alternate payee or beneficiary. The plan recipient of the recommendation retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility and are held to the same standard of care under ERISA.
A 3(38) investment manager takes on the full responsibility of managing the investment lineup and has the discretion to make necessary changes. In doing so, the 3(38) Investment Manager takes on the primary fiduciary responsibility for investment decisions. But the plan’s named fiduciary (or its delegate(s)) retains the fiduciary responsibility for the selection and ongoing monitoring of the 3(38) investment manager. ERISA identifies the 3(38) advisor as an investment manager.
A 3(16) fiduciary, as used by service providers, is typically an organization that takes fiduciary responsibility for the administration of a retirement plan. A 3(16) fiduciary partner acts as a plan administrator for some, or all depending on the engagement, of the plan’s administration and expressly accepts certain fiduciary responsibilities for doing so. It is important to review the 3(16) contracts to ensure they accept the fiduciary responsibilities you are interested in delegating. And the plan sponsor still retains the fiduciary responsibilities of prudently selecting and monitoring the 3(16) fiduciary.
In addition to the above ERISA-defined fiduciary roles, it is common for individual representatives of retirement industry service providers to carry certain financial designations. These designations represent a broad spectrum of time commitment and education in addition to having different focuses in terms of industry-related expertise. The following are some of the more broadly utilized designations in the retirement industry (in no particular order):
The Chartered Financial Analyst® or CFA® designation is an internationally recognized certification issued by the CFA Institute. It is earned by completing an arduous self-study program and three separate 6-hour exams increasing in difficulty over several years. These studies typically take about 700-950 hours to complete, and then a CFA® charter holder must complete four years of relevant work experience.
A CFA® charter holder is educated and tested on a wide array of topics including investments, statistics, and statistical analysis, along with economics, financial modeling, and corporate finance. A CFA® charter holder must also follow all prescribed ethical guidelines.
Someone with this designation often works in the corporate investing field and provides a high level of investment counsel, working with clients on investment and financial analysis.
The Certified Investment Management Analyst or CIMA certification indicates an advisor with skills in evaluating investment managers and others who provide financial products and services. A CIMA professional can consult with clients by helping to determine what products and investments are in their best interest.
A CIMA designation indicates knowledge and interest surrounding investments, portfolio management, behavioral finance, and economics focusing on asset allocation and investment consulting. A CIMA professional typically advises high net worth companies or individuals, assessing risk and making decisions for the individual or entity it serves.
A Certified Financial Planner certification (CFP) indicates that the financial planner has significant expertise in personal financial planning, portfolio management, budgeting, estate planning, and taxes. Financial planners are typically working with individuals to build a financial plan.
There is also an ethical component to the certification process, in that each CFP professional must meet ethical fitness standards and agree to always put the client’s needs first.
The Chartered Financial Consultant (ChFC) certification is similar to the CFP but doesn’t require completing a board exam. The ChFC certification focuses on all aspects of financial planning like investments, tax, estate planning, and insurance.
A ChFC professional typically works on comprehensive financial planning and consulting like employee benefits planning, asset protection, and tax planning, estate tax, transfer tax, and gift tax.
A financial advisor’s certifications indicate their expertise, specialties, and interests. Be sure to inquire about their clientele in order to determine if they have experience and expertise dealing with plans like yours in terms of size, complexity, and breadth of services you require.