What Are 3(38) Services?

3(38) services refer to a type of fiduciary investment management service in which an investment manager is appointed to have full discretionary authority over the investment decisions of a retirement plan. This designation, under Section 3(38) of the Employee Retirement Income Security Act (ERISA), shifts the responsibility and liability for selecting, managing, and monitoring the plan’s investments from the plan sponsor to the investment manager. By engaging a 3(38) fiduciary, plan sponsors can offload the complexities and risks associated with managing a retirement plan’s investments while ensuring that these decisions are made in the best interests of plan participants.

The Role of a 3(38) Fiduciary

Under ERISA, a 3(38) investment manager is a fiduciary with the authority to make all investment decisions for the plan without needing approval from the plan sponsor. This includes selecting investment options, monitoring performance, making changes to the investment lineup, and ensuring that all investment actions comply with ERISA’s fiduciary standards [1]. The investment manager is legally bound to act prudently and solely in the interest of the plan’s participants and beneficiaries.

Once a 3(38) fiduciary is appointed, the plan sponsor’s role in managing investments becomes more hands-off. The sponsor is responsible for overseeing the 3(38) manager’s performance, ensuring that the fiduciary is meeting their obligations, but the day-to-day decision-making and liability for those decisions rest with the 3(38) fiduciary [2].

Benefits of 3(38) Services

One of the primary benefits of 3(38) services is the significant reduction in fiduciary liability for the plan sponsor. By transferring investment decision-making authority to a qualified 3(38) fiduciary, the sponsor is no longer responsible for the selection and monitoring of investments. This can be particularly advantageous for sponsors who may lack the expertise or resources to manage these responsibilities effectively.

Another key advantage is the potential for improved investment outcomes. 3(38) fiduciaries are typically experienced investment professionals with a deep understanding of market trends, regulatory requirements, and risk management strategies. Their expertise allows them to make informed decisions that align with the plan’s goals and the best interests of the participants. Additionally, because they have full discretion, they can respond quickly to market changes and adjust the investment lineup as needed without the delays that might occur if every decision required sponsor approval [3].

Considerations When Choosing a 3(38) Fiduciary

Selecting the right 3(38) fiduciary is a crucial decision for plan sponsors. It is important to thoroughly vet potential investment managers to ensure they have the necessary qualifications, experience, and a strong track record of performance. Key factors to consider include:

• Expertise and Credentials: Look for fiduciaries with proven expertise in managing retirement plan investments, including relevant certifications and professional designations (e.g., CFA, CFP).
• Performance History: Review the fiduciary’s past performance in managing similar retirement plans, including their approach to risk management and their ability to meet or exceed investment benchmarks.
• Fee Structure: Ensure the fees charged by the 3(38) fiduciary are reasonable and transparent. Understand how these fees are structured—whether they are flat fees, percentage-based, or a combination of both—and how they impact the overall cost of managing the plan.
• Communication and Reporting: Effective communication is key. The 3(38) fiduciary should provide regular, detailed reports on investment performance, as well as updates on any changes made to the investment strategy [4].
• Alignment of Interests: Ensure that the fiduciary’s investment philosophy aligns with the goals of the retirement plan and the needs of its participants.

The Sponsor’s Ongoing Role

While the 3(38) fiduciary takes on the primary responsibility for investment decisions, the plan sponsor still has an important role to play. The sponsor must prudently select and monitor the 3(38) fiduciary, ensuring that they continue to fulfill their obligations. This includes regularly reviewing the fiduciary’s performance, verifying that they are acting in the participants’ best interests, and taking corrective action if necessary. The sponsor remains responsible for the overall governance of the plan, but with the significant benefit of reduced liability in the area of investment management.

In summary, 3(38) services provide a powerful solution for plan sponsors seeking to delegate the complexities of investment management to a professional fiduciary. By doing so, sponsors can focus on other aspects of plan administration, confident that their plan’s investments are being managed by an expert with a legal obligation to act in the best interests of the participants.

References:

[1] U.S. Department of Labor. (n.d.). Understanding Retirement Plan Fees and Expenses. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/understanding-retirement-plan-fees-and-expenses.pdf 

[2] American Society of Pension Professionals & Actuaries. (2020). Fiduciary Responsibility and Investment Selection. Retrieved from https://www.asppa-net.org/news/fiduciary-responsibility-and-investment-selection 

[3] Investment Company Institute. (2021). The Role of 3(38) Fiduciaries in Retirement Plans. Retrieved from https://www.ici.org/articles/the-role-of-338-fiduciaries-in-retirement-plans 

[4] Plan Sponsor Council of America. (2022). Choosing and Monitoring a 3(38) Investment Manager. Retrieved from https://www.psca.org/blog/retirement/choosing-and-monitoring-a-338-investment-manager 

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