The ERISA 3(21) and 3(38) Gold Rush

We all remember the story of the California Gold Rush when gold was discovered in Sutter’s Mill in 1848. This discovery spurred the Forty Niners (not the Joe Montana-Roger Craig (special thanks to Lawrence Taylor for stripping the ball Craig from in the NFC Championship Game in January 1991) kind), about 300,000 to move to the Gold Coast. We also remember the era of the late 1990’s where it seemed everyone had their own online business. The lesson is that whenever a business or venture becomes popular, other people try to enter the market and most of the time, flop. Ask the brains behind Hewlett Packard’s TouchPad and Blackberry’s Play Book.

One of the most positive developments of the retirement plan industry in the last five years has been the proliferation of independent ERISA fiduciaries such as ERISA §3(21) and 3(38) fiduciaries, who have helped plan sponsors minimize their fiduciary liability. These ERISA fiduciaries add some expertise to an industry that truly needed it.

That being said, the popularity of ERISA fiduciaries has spurred many financial advisors to try offering a §3(21) and §3(38) service. The problem is like the previous gold rushes of the past is that you may have the entry of financial advisors into the market that have no idea what an ERISA fiduciary does, as well as how the fiduciary process is being handled by an ERISA §3(21) and §3(38) fiduciary. They will enter the fiduciary gold rush with a tin pan and not much else.

Unlike some of the accredited positions in the retirement plan industry, there is no requirement a financial advisor needs to meet (except making sure those services are covered under their liability insurance) to hold themselves out as an ERISA §3(21) or 3(38) fiduciary. So there will inexperienced ERISA fiduciaries who probably won’t seek out the advice of an ERISA attorney (cough, cough) or an experienced ERISA fiduciary whoand will end up doing an incompetent job. The problem with an incompetent ERISA fiduciary is that the hiring of a fiduciary by a plan sponsor is a fiduciary function and the hiring of a negligent fiduciary is a breach of that plan sponsor’s fiduciary duty.  So hiring an incompetent ERISA fiduciary defeats the purpose of hiring an ERISA fidcuairy.

So the lesson to be learned is that plan sponsors needs a process to evaluate potential ERISA fiduciaries and financial advisors seeking to enter the ERISA fiduciary market should consult with ERISA attorneys and experienced ERISA fiduciaries to understand what being a §3(21) or §3(38) fiduciary is all about.

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One Response to The ERISA 3(21) and 3(38) Gold Rush

  1. Brilliant Ary. Thank you. Thank you. Thank you.

    I’ve run into numerous advisors who thing 3(38) is a magic code that immediately makes them a more qualified service provider. The most recent, cut the heck out of the cost of plan accounting, investments, and recordkeeping, (Increased the advisor fees by 50% over the normal market) while moving a plan. The accounting became an absolute disaster. The new “administrator” began running a safe harbor non-elective like a safe harbor match in the middle of the plan year. “Well is that a serious problem?” ask the 3(38) who not only volunteered to monitor investment options, but insisted on a change of service providers to extremely deep discount options. “Yeah buddy. That is a problem….Do you actually know what makes a plan Qualified?” I asked this self-appointed expert. He thought it was an absurd question, but he didn’t actually know the answer.

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