3(38) in 2021

2021 – there’s never been a better time for retirement plan sponsors to consider hiring an advisor who will accept delegation to serve as their 401(k) plan’s Fiduciary Investment Manager.

Often known as a 3(38) advisor, these professionals bring a high level of investment expertise and fiduciary prudence to the selection and monitoring of 401(k) plan investments. They also remove that responsibility – and the potential liability that accompanies it – from the plan sponsor.

ERISA – the Employee Retirement Income Security Act – requires that plan sponsors offer participants investments that have been expertly selected and regularly monitored. Prudent practices suggest monitoring should occur quarterly. Having the expertise and the time for this fiduciary responsibility is a large task for most plan sponsors.

In 2021, the benefit of hiring a 3(38) advisor increases. Lawsuits against plan sponsors “exploded” in 2020, per a recent article in Investment NewsInvestment selection and monitoring were the focus of most lawsuits, with a recent suit alleging “breach of fiduciary duties related to underperforming investment options.” When fiduciaries are found guilty of such charges, the liability is personal, with plan repayments, fines and penalties that can be levied against the personal assets of plan sponsors.

While ERISA sets a high bar with its “expert” standard, it permits 401(k) sponsors to delegate the responsibility for investment selection and monitoring to a “qualified” professional. Brokers and insurance representatives do not qualify under ERISA’s rules. A “qualified” advisor can be a Registered Investment Advisor or, alternatively, a bank or insurance company that has no conflicts of interest.

Most 3(38)s who are willing to accept delegation from the sponsors of small and mid-size 401(k) plans are Registered Investment Advisors. Sponsors should beware of large recordkeeping companies advertising 3(38) “protection.” This “protection” often involves the sponsor receiving a list of investments that have been reviewed by a Registered Investment Advisor. This type of “protection” does not relieve the plan sponsor of any responsibility. The sponsor still must act “expertly” in reviewing the investment list on a frequent basis.

It’s helpful to understand the difference between a 3(38) advisor and a 3(21) advisor. A 3(38) advisor relieves the plan sponsor of the responsibilities with investment selection and monitoring, as well as the potential liability that accompanies this obligation. A 3(21) advisor is considered a co-fiduciary and assists plan sponsors with decision-making, but the advisor does not relieve the sponsor of the ultimate responsibility or the potential liability for those actions.

In 2021, there are additional reasons to consider hiring a 3(38) Fiduciary Investment Manager beyond reducing fiduciary risk in an atmosphere rife with 401(k) plan lawsuits.

2020 was a year of investment volatility due to the coronavirus and economic uncertainty. Regulation from the DOL on prudent investment selection for 401(k) plans in the face of growing interest in ESG (environmental, social or governance) funds emphasized the importance of exercising expertise and prudence in choosing plan investments. Unless a plan sponsor understands the history of the markets and prudent investment practices, and regularly and diligently reviews plan investments, hiring a 3(38) Fiduciary Investment Manager offers the expectation that the plan will provide better investments for participants in addition to reducing the sponsor’s potential liability.

Then there’s the quandary of time. Best practices dictate not only a quarterly review of plan investments but more frequent reviews when markets are volatile. A 3(38) Fiduciary Investment Manager can save company managers time that can be better devoted to determining how to operate profitably in a business world dramatically changed by COVID-19.

How should a plan sponsor get started? Registered Investment Advisory firms can be located by an online search of “fee only advisors” or by consulting a financial search site, such as the NAPFA Find an Advisor site or the Financial Planning Association Find a Financial Planner site.

Making 2021 the year to hire a 3(38) Fiduciary Investment Manager for your company 401(k) plan reduces potential personal liability for plan fiduciaries, offers the expectation of better investments, and frees up business managers to develop operations that will lead to success in a changing economy.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.