Most organizations’ human resource departments and C-suites are seeking efficiencies and risk mitigation for their entities. For these, and a myriad of other, reasons, plan sponsors are giving 3(38) fiduciary discretionary investment management services a closer look.
When exploring 3(38) services, it is important to understand the following: 3(38) and 3(21) are sections of ERISA, which provide definitions for certain types of fiduciaries. Thus, there are significant differences between an ERISA 3(21) and 3(38) advisors in terms of investment services provided to the plan.
Simply stated, an ERISA 3(21) advisor makes investment recommendations to the plan fiduciaries (committee), yet the decision to implement the recommendations and attendant legal responsibility still falls to the plan fiduciaries (oftentimes an authorized committee). “You can’t blindly follow the recommendations of the 3(21) advisor. You have to make an independent decision, and though that’s usually what the advisor recommends, you’re not excused from making an informed decision just because the advisor recommended it,” says Carol Buckmann, Esq.^1
Buckmann further cautions, “You don’t get told about the tremendous level of risk that you take on as the plan fiduciary when you start a 401(k)” …. Carol’s insight revealed “…a litigation landscape littered with the lawsuits of plan sponsors who didn’t do their due diligence.” … (in a 3(21) environment)^1
An ERISA 3(38) advisor encompasses 3(21) responsibilities and makes the actual investment selections and decisions based on plan needs and goals, as conveyed to him/her by plan fiduciaries. A 3(38) advisor is responsible for his/her own mistakes or mismanagement, including reasonableness of performance and expenses. The plan fiduciaries are responsible for prudently selecting a good 3(38) advisor and monitoring performance. In terms of financial liability, if an ERISA 3(38) advisor is prudently appointed and monitored by the authorized fiduciary, the plan sponsor should not be liable under ERISA for the acts or omissions of the investment manager. The plan sponsor will also not be required to invest or otherwise manage any asset of the plan which is subject to the authority of the investment manager.^2
A 3(38) Fiduciary may be a better choice for you if you want to maximize fiduciary liability protection for selection and monitoring plan investments, and/or have no internal plan fiduciary with the requisite expertise and credentialing to assume investment decisions and liabilities. Even a 3(38) advisor cannot completely remove plan fiduciaries from all investment liability, as they retain the responsibility of monitoring the 3(38) advisor with regards to their suitability for the plan. However, the outsourcing of investment-related fiduciary responsibilities should lessen the amount of time and attention plan sponsors need to spend administering their plan.
A 3(21) Fiduciary may be a better choice if you have the time, interest and investment expertise needed to monitor investment performance regularly. You will also need to evaluate the 3(21)’s recommendations and have evidence showing your investment decisions are in the best interests of your plan participants, while assuming the liability for determining reasonableness of investment costs and performance. A 3(21) advisor’s job is to identify investments which are appropriate for the purposes of the plan and make appropriate recommendations to the plan’s fiduciaries. The plan’s investment committee is responsible for determining suitability for their plan from cost/benefit and risk/reward perspectives, as well as appropriateness for participants and plan goals.
Newly available pooled employer plans (you may have heard them referred to as PEPs) often incorporate a 3(38) investment advisor and other elements/entities meant to help plan sponsors offload even greater fiduciary responsibilities, potentially lowering costs and streamlining administration. If you are interested in learning more, ask your KerberRose Trusted Advisors about either 3(38) services or PEPs as an alternative.
^1 Carol Buckmann is a founding partner at Cohen & Buckmann PC, a boutique law firm practicing exclusively in the areas of employee benefits, executive compensation and investment adviser law. https://www.forusall.com/401k-blog/3-21-fiduciary-vs-3-38/
^2 ERISA Section 405(d)(1) https://advisor.morganstanley.com/the-trc-group/documents/field/t/tr/trc-group/Understanding_3_21_v_3_38_Fiduciary.pdf