One of the best developments in the retirement plan business over the last ten years is the proliferation of advisors serving as an ERISA §3(38) fiduciary. The idea that a plan sponsor can shift almost all of their liability in the fiduciary process to an ERISA defined investment manager is attractive in a litigious happy environment. Sort of like having the folks at Stew Leonard’s to cook my annual Thanksgiving dinner, it allows the plan sponsor to delegate almost all of the headaches of being a fiduciary to the experts.
While I support the work of ERISA §3(38) fiduciaries, I have two concerns. They are two minor concerns that should not overshadow the good work of ERISA §3(38) fiduciaries.
First, I can’t put a sign on my front lawn that I am a lawyer unless I have been admitted to the state bar. The same can be said of advertising being a registered investment advisor (RIA) without the proper licensing and registration. However, I can claim to be an ERISA attorney without any experience and an RIA can claim to be an ERISA §3(38) fiduciary without any experience. While any RIA can learn to be an ERISA §3(38) fiduciary, it’s not something you can wake up one morning and can become one. So plan sponsors should be wary of people advertising themselves as an ERISA §3(38) fiduciary because not all ERISA §3(38) fiduciaries are created equally. The proliferation of ERISA §3(38) fiduciaries will create a herd mentality where I think so RIAs will tout their ERISA §3(38) services without understanding what that job entails.
So with the marketplace expanding with people claiming to be ERISA §3(38) fiduciaries, there will be some incompetent ERISA §3(38) fiduciaries out there who will make some mistakes that will lead to litigation and the issue is that ERISA §3(38) was drafted in 1974, years before there were ever 401(k) plans and daily valued, participant-directed plans. While ERISA §3(38) fiduciaries assume the liability of being an investment manager in the contract (if drafted correctly), will courts decide that what the ERISA §3(38) fiduciaries really are who they say they are? Are their function covered under a definition that was drafted before there was a 401(k) industry? I don’t know, I’m not a litigator. I am also not stating that hiring an ERISA §3(38) fiduciaries are a mistake nor do I want to spread any innuendoes (like what happened with multiple employer plans), I just think that plan sponsors should hire competent fiduciaries and if RIAs want to be in the §3(38) game, they need to learn the rules. Of course, any advisor interested in that side of the business should give me a call.