I will say it again, I think the offering of an ERISA §(3)(38) fiduciary service is one of the nice developments in the retirement plan business. While the “investment manager” definition has been in ERISA since the beginning of time, it has only been an offering for 401(k) plans over the past few years. As with anything, it’s a nice service for plans who need the help. However, it’s nice while it lasted or at least until the few lawsuits that will certainly involve it.
How am I so sure that there will be litigation surrounding the §3(38) fiduciary? Well, as with anything, a proliferation of any product or service will bring in some people into the business who don’t know what they are doing. That will be people who don’t understand the fiduciary process because they are inexperienced or companies that offer a 3(38) service at the behest of one of these insurance company or mutual fund providers. I think that any §3(38) fiduciary being touted by one of these providers as an exclusive solution have to be worried about independence issues, whether their decisions are not tainted by the relationship with one of these providers. The moment that one of these fiduciaries makes a decision on which investments to make, based on a menu of funds that are cherry picked by an insurance company or mutual fund provider opens themselves up to a whole heap of trouble. Let’s face it, funds that are cherry picked for a specific fund lineup by a third party administrator or bundled provider aren’t usually cherry picked because they are inexpensive. I suggest that any ERISA independent fiduciary is breaching their duty of prudence and loyalty to the plan sponsor and participants the moment that they narrow their fund selection based on suggestions by any other provider.