ERISA §3(38) Fiduciaries and the Flavor of the Month

One of the most positive developments in the retirement plan business is the proliferation of independent ERISA §3(38) fiduciaries. While the §3(38) defined investment manager has been in ERISA since the beginning in 1974, there has been a dramatic increase in the number of registered investment advisors offering this option to their clients.

The uniqueness of the §3(38) proposition is that the §3(38) fiduciary has discretionary authority, assuming the liability of the fiduciary process from the plan sponsor. It’s a nice proposition because many 401(k) plan sponsors don’t do a job of handling it on their own or with the help of a financial advisor. Development of an investment policy statement (IPS), selection and review of investment options based on that IPS, and offering education to participants for participant directed plans isn’t an easy task. Please note that the hiring of an ERISA §3(38) is a fiduciary function, so plan sponsors may be on the hook if they hire a poor §3(38) fiduciary.

While many other professionals think that the ERISA §3(28) boom is just the flavor of the month, I disagree. There are too many financial advisors in this industry that have skirted from taking on any fiduciary role with their clients; I worked for a producing third party administration (TPA) firm who disclaimed any fiduciary role as an RIA. So it’s nice to see someone take on the liability and the risk at a management fee that is as good as those who want no fiduciary role in their role as a financial advisor.

That being said, an ERISA §3(38) fiduciary does not have to be the choice for every plan sponsor. A plan sponsor who is diligent in working with a competent retirement plan advisor can do a good job as well. Then again, every solution in the retirement plan business isn’t the solution for everybody, just like an ERISA attorney who charges a flat fee that is as reasonable of what the legal departments of TPAs charge. Then again, that’s another story for another time.

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