29 April 2017
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David Park
CEO of Austin Capital Trust
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Great Demand for 3(38) Fiduciaries
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As retirement plan regulations continue to tighten, more small plan sponsors like the idea of working with a 3(38) manager who takes full discretion with investments.  By hiring a 3(38) manager, the adviser to the plan still has a key role. The alliance frees the adviser to concentrate more on client services including participant education and client relationship. 

The demand for a 3(38) manager is emerging in the defined contribution market. There are two key reasons that more sponsors now choose to work with 3(38) fiduciaries. First, there has been a striking rise in the number of defined contribution participant lawsuits, as well as increased attention from regulators and legislators on the results these plans achieve for participants. Second, more sponsors are coming to realize that the decisions to change investment options should be left in the hands of professional money managers, versus well-meaning committee member who may not have the expertise to make these decisions prudently and take personal fiduciary liability. Additionally, in the cost-conscious era, sponsors concerned about 3(38) fees may find the services less expensive than they might have thought. The cost spreads between 3(21) and 3(38) services have narrowed dramatically; the sensitivity around fiduciary risk has increased; and a 3(38) manager seems to be a better value now than perhaps a few years ago. 

The 3(38) manager differentiator is the robust investment due diligence process. Many non-fiduciary advisers simply make their recommendations based on what their mutual fund wholesales tells them. But someone who is taking on the discretion for building a 401(k) lineup has to have the expertise, and take the time, to actually do the research to build a lineup that truly in participant’s best interests. Because a 3(38) manager has discretion on investment decision, the manager oversees that lineup, and is liable if anything were to happen. Plan sponsors are a fiduciary to that plan by default and they just don’t have the expertise or the time. 

A 3(38) manager is entrusted with the duty to select, monitor and, if necessary, replace the plan’s investment options. Normally, this is the duty of the plan sponsor. A 3(21)(A)(ii) nondiscretionary fiduciary cannot take on that task. Only a 3(38) investment manager under ERISA accomplishes that. To summarize the difference, the 3(21) advisor is an advice-giver, while a 3(38) manager is a plan decision maker. 

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