Why Might a "3(38)" Manager Make Sense for Your Retirement Plan? By: Mark HutterAIFA®, QPFC

By hiring a “3(38)” advisor to serve the organization’s retirement plan, a plan sponsor can delegate some of the fiduciary responsibilities with which they are least comfortable.  Not having to approve investment decisions, plan sponsors can reduce the amount of due diligence needed while providing an additional layer of fiduciary protection to the plan.

Since the 2008 financial crisis, we have seen a trend in both public and private sectors where continued financial pressures and reductions in staff have forced employers to do “more with less.”  This dynamic, in concert with higher market volatility, an increase in qualified-plan regulations, and more plan litigation, has made it increasingly difficult for plans sponsors to maintain proper oversight.

These concerns are exaggerated in the healthcare industry, where an increase in both government (i.e.: Affordable Care Act, Recovery Act EMR/EHR) and insurance regulation has substantially increased administrative burdens.  As hospitals and other providers change models and band together, they must assess the most effective way to provide employees’ retirement needs.

ERISA (Employee Retirement Income Security Act of 1974) is the federal law that established standards to protect the interests of employee benefit plan participants and their beneficiaries.  Part of ERISA defines and establishes standards of conduct for plan fiduciaries.  ERISA 3(21) and ERISA 3(38) simply refer to ERISA section numbers that contains the definitions referring to various levels of fiduciary care. 

Both 3(21) and 3(38) investment fiduciary advisors accept fiduciary responsibility and adhere to ERISA 404(a)’s duty to act solely in the interest of plan participants, along with meeting the “prudent man” standard of care.  Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor’s fiduciary status.  

Any individual is a 3(21) fiduciary if s/he exercises any authority or control over the management of the plan or the management or disposition of its assets, provides investment advice for a fee, or has any discretionary responsibility in the administration of the retirement plan.  New laws (effective April 2017) will force brokers and other consultants who have historically denied fiduciary status to accept fiduciary responsibility and act accordingly.

A 3(21) investment fiduciary is a paid provider that will provide investment recommendations but does not have discretionary authority to make the decisions, as the plan sponsor may accept or reject those recommendations and then execute the investment decisions for the plan. The 3(21) investment fiduciary and plan sponsor in this case share fiduciary responsibility.  Thus, you will often see the 3(21) investment fiduciary referred to as a co-fiduciary.

The 3(38) investment manager, however, has full fiduciary responsibility for its investment decisions, subject to the terms of the plan documents and its investment policy statement. In a defined contribution plan, this means the investment manager will not only select and monitor the investment in the plan, but will also have the authority to remove and replace investment options offered to plan participants.  The 3(38) investment fiduciary, typically a Registered Investment Adviser (RIA), bank or insurance company, must acknowledge its fiduciary status in writing. The plan sponsor and all other plan fiduciaries are relieved of all fiduciary responsibility for the investment decisions made by the 3(38) investment fiduciary under ERISA 405(d). Due diligence responsibilities are limited to the selection and monitoring of the advisor and not to the acts or omissions of the advisor.

For plan sponsors, some key takeaways when considering appointing a 3(38) investment fiduciary:

Accountability - A 3(38) investment fiduciary arrangement transfers the responsibility and risk associated with the selection and monitoring of the plan’s investment option away from the plan sponsor. This approach does not completely absolve the plan sponsor of liability, as they retain the responsibility to select and monitor the advisor. This is an additional layer of protection provided to plan fiduciaries.

– Many industries, including health care, face a more mobile workforce, which can lead to greater personnel and organizational changes.  A 3(38) arrangement can provide a level of consistency to your retirement plan.  Whether decisions are made by one key decision maker or an Investment Committee, using a 3(38) arrangement allows for a consistent investment process regardless of personnel changes to the organization.  This may be an attractive feature for plan sponsors looking to attract committee members.

– While the overall value of a retirement program is influenced by many factors, a 3(38) arrangement reduces the time that is normally involved with the investment selection and monitoring process.  This approach allows the plan sponsor to focus more time on the other elements of the plan (i.e.: plan design, education, etc.) that will help drive more successful outcomes for its participants.  

In the challenging health care environment, taking a step back to periodically assess your approach to managing your retirement plan and whether it is meeting your plan goals and objectives is always prudent.Just don’t forget to document.  This process may lead to plan changes that could improve efficiencies and participant outcomes without increasing employer cost.

There is no one “right way” for all plans, whether you are looking at plan design, investment menu design, participant education or fiduciary oversight.  However, the decision to implement a 3(38) arrangement elevates the definition of care to the greatest degree under ERISA and can add many benefits.


Mark Hutter

Mark Hutter is a Principal of Fiducia Group LLC, where he leads the Taft-Hartley consulting practice. Mark also manages Fiducia Group’s Investment Committee and participant-advocacy and product-development initiatives.

Mark has over 25 years of diverse experience in the retirement and financial services...

More about Mark Hutter
Sign up for our Newsletter

More Articles From This Issue

Sign up for our Newsletter