The ERISA §3(38) Fiduciary as a “Mark”

As we know with the Danny Ocean trilogy of films is that every confidence game needs a mark. The mark is chosen to be a victim either through the con artist’s targeting of the mark or because of the mark’s greed.

There has been a burgeoning of business in the ERISA §3(38) space where ERISA defined investment managers assume the bulk of a plan sponsor’s liability in the fiduciary process. It has been a booming business that many of the bundled providers and/or insurance company providers have been touting that they will offer a §3(38) solution through the offering of such fiduciary services by a third party and it’s usually the same third party. To me the issue is that there needs to be independence for the §3(38) fiduciary and it’s often hard if you are partnering up with an insurance company or mutual fund company and “independently” chose their funds. While there is nothing wrong with this situation from a legal standpoint until things can go horrible wrong and if things go horrible wrong, the §3(38) fiduciary may have made themselves to be a mark.

Suppose for some strange curse, the worst mutual fund company know to man, the Steadman funds were resurrected and they offered a bundled 401(k) product and platform. Suppose they partner up with ABC Trust to serve as the §3(38) fiduciary for the plans on the platform and the §3(38) fiduciary picks some Steadman funds. If the participant sues because the Steadman funds were dogs (Old Yeller type of dogs), who is going to get hit with a big lawsuit? While the plan sponsor will get loads of shrapnel (hiring a 3(38) is a fiduciary function),  the investment manager as the 3(38) will get loads of liability.

While this is all hypothetical, this will happen one day. It has to because a 3(38) fiduciary is going to make a mistake either through blind faith or greed.

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