Understanding the Risks of Being a 3(38) Fiduciary

Retirement plan sponsors often turn to their financial advisors to help them handle key responsibilities. Since navigating the legalities and complexities of retirement plans is typically not their core competency, it’s natural for plan sponsors to offload many of the associated tasks required for proper plan administration.

Enter your role as a 3(38) fiduciary.

While you may welcome the business relationship of being assigned as the 3(38) fiduciary, it’s also important to understand the legal implications and risks involved with performing the role.

What’s a 3(38)?

In a retirement plan, 3(38) fiduciaries are given discretion over most decisions regarding investment choices, such as implementing the lineup of suitable and appropriate investment options to be offered in the plan.. While plan sponsors are still responsible for overseeing these fiduciaries, they generally transfer much of the risk and responsibility associated with plan monitoring and selection over to a 3(38) fiduciary.

This is unlike the role of a 3(21) fiduciary, also known as a “co-fiduciary,” who has less authority when it comes to plan decisions. While plan sponsors may rely on the advice of a 3(21) fiduciary’s investment analyses and recommendations, it is ultimately the plan sponsor’s role to make major investment plan selections.

Today, the latter relationship is more common, with 82% of retirement plan advisors serving as 3(21) fiduciaries, despite the the number of 3(38) offerings doubling since 2011, likely due to the rise in litigation targeting 401(k) plan sponsors.

With great power, comes great responsibility

While you may charge a premium for performing the 3(38) role, you may not wish to take on the added risk of fulfilling much of the ERISA plan sponsor’s legal requirements. This is especially true for smaller plans where you may not be able to make the business case for the services involved. It’s worth considering the amount of business you’ll be providing in relation to the responsibility that comes with it.

As a 3(38) fiduciary, you are committing to serve as the formal investment manager for an employer’s plan. As such, you will be required to provide regular fiduciary reports to the plan sponsor, and document your rationale for investment and fund change recommendations as well as any time you execute on said recommendations.

Adherence to IPS

With the addition of full investment discretion, you must document that you are adhering to the plan’s Investment Policy Statement (IPS), and that all investment decisions are made in the plan participants’ best interests. You may even be asked to help develop an IPS. Importantly, as a 3(38) fiduciary, your processes and methods must be that much more detailed and circumspect than those of a 3(21) fiduciary.

Expertise Required

Being a 3(38) fiduciary is a specialized role that requires specialized expertise. Advisors who dabble in the 401(k) space and advise only a few plans may not wish to take on the responsibility – and liability – required. Fortunately, that’s where external providers can help with the heavy lifting. Integrated solutions now offer you the option to offload the certain levels of fiduciary liability while still putting the power in the advisor’s hands to personally guide clients with their retirement decisions. We recommend exploring how these options ease the fiduciary liability you carry while giving your sponsors and participants the customized plans and advice they value most from their trusted advisor.