Why You Should Hire a 3(38) Fiduciary

For many plan sponsors, designating an ERISA 3(38) investment manager to manage, select, and monitor the retirement plan’s investments can be beneficial. It allows the plan sponsor to have more time and attention to focus on other aspects of the organization along with managing tasks that are otherwise difficult to outsource. There are many benefits if you decide to hire a 3(38) fiduciary, but it’s important to understand the advantages (and disadvantages) of their role and the questions you should ask when vetting an investment advisor/manager to take on the role for your retirement plan.

Overview and Duties of a 3(38) Fiduciary

A 3(38) fiduciary is one vested with the full discretionary authority (under the provisions of ERISA) to have control over the assets of a retirement plan and make investment decisions with the guidance of a plan sponsor and/or the investment committee. The 3(38) investment manager is important to a plan in that they complete the transfer of investment liability with respect to the day-to-day management of the plan’s investments. This does not mean, however, the act of hiring a 3(38) fiduciary eliminates the fiduciary responsibilities of a plan sponsor; it does however provide a valuable liability shield, which allows you to create a fiduciary line of defense.

Some of the specific duties undertaken by a fiduciary under section 3(38) of ERISA includes:

• Selecting investments for the plan;
• Managing the plan’s investments;
• Monitoring investment performance, risk and fees; and,
• Benchmarking performance, risk and fees to industry standards to maximize ROI.

Advantages of a 3(38) Fiduciary

There are many advantages which come with the appointment of a 3(38) fiduciary. All plans have a specific duty, pursuant to section 404(a) of ERISA to act in a manner “solely in the interest of the participants and beneficiaries” of the plan. This affirmative duty, known as the “Prudent Person Rule,” drives the decision-making process of the fiduciary to ensure investment choices align with the overall best interests of your participants and their beneficiaries.

Successful management of your plan assets and guiding them into appropriate investment selections requires your full attention and effort. Performing these duties as a non-investment professional may place in peril the potential investment return for plan participants depending on performance, risks and fees to fund their future income needs in retirement. This is where a clear advantage of hiring a 3(38) fiduciary is seen – professional investment management by a dedicated third-party you hire to direct the investment decisions of the plan.

Other advantages associated with hiring a 3(38) fiduciary includes:

• Reduction in fiduciary liability for the plan sponsor – you are permitted under ERISA to hand off a portion of your fiduciary duties with respect to the research, selection, monitoring, and management of the investments in your retirement plan. Hiring a 3(38) does not absolve you completely from your fiduciary duties, but it reduces some of your burden under ERISA.
• The addition of professional portfolio management and oversight – the use of a 3(38) brings a valuable member to your plan and investment committee. A professional manager with years of experience in investments brings necessary oversight and management expertise necessary to help guide the plan toward its investment objectives and goals.
• Allows you to focus on your core competencies – the use of a professional investment manager gives you the time to focus on what it is you do best. Your time and efforts can be redirected to the core competencies you have mastered to grow your business, knowing your valuable retirement benefits program is in good hands.

Concerns Over Hiring a 3(38) Fiduciary

Hiring a 3(38) fiduciary is not without cost. The addition of a seasoned investment manager will result in higher costs for your plan – a consideration which must be weighed as part of your cost/benefit analysis. The liability an outside fiduciary is willing to accept will have an associated cost for the plan – you should seek a manager whose value-add to the plan exceeds this cost.

Additionally, communication and planning are necessary to ensure the desired outcome for the plan is met. You cede control over the investment decision making process in exchange for the peace of mind which comes with reducing your fiduciary liability. You must be able to trust, implicitly, the ability of your fiduciary to deliver results and assuage any concerns you may have regarding your fiduciary responsibility under ERISA.

Questions to Ask When Reviewing a Potential Investment Advisor/Manager

When considering a potential 3(38) fiduciary to manage your plan’s investment you must know, at a minimum:

1. What is the fiduciary’s experience with managing retirement plan assets?
2. How long have they been in the business of managing investments?
3. What is the investment philosophy of the 3(38) fiduciary (i.e. aggressive, conservative, risk-taking, risk adverse, etc.) and what is their investment process for selecting and monitoring investment options?
4. What is their philosophy and process for selecting and monitoring target date and managed account solutions? Do they offer custom solutions?
5. How does your fee structure for the management of plan investments compare to other fiduciaries in the marketplace?
6. How frequently will you communicate with the plan sponsor to discuss investment philosophy, strategy, and results YTD?

This certainly is not an exhaustive list of question you should ask. But consider that if you choose to give up a portion of your fiduciary responsibility to a third-party, you must be confident in this decision by performing a complete and thorough due diligence. The work you do in properly vetting a 3(38) fiduciary should pay future dividends to the benefit of your employees and plan participants.

Let PlanPILOT Help

If you are considering outsourcing your investment fiduciary or learning more about your fiduciary responsibilities, PlanPILOT can help. As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or record-keeper. We offer clients unbiased advice and assistance to control their retirement plan risks and deliver benefits effectively. We encourage you to contact us at (312) 973-4911 or info@planpilot.com.

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