Should Your Company Hire an ERISA 3(38) Investment Manager for The 401(k) Plan?

The 401(k) plan has attracted substantial attention, some wanted, some unwanted, in an effort to improve the quality of retirement plans for American workers. New regulations are being added or considered every day. For instance the new 408(b)2 fee disclosure regulations become effective later this year. These regulations are expected to change the ways plans are sold and by whom. These regulations are a real game changer.

Rewarding Eco-Friendly Farmers Can Help Combat...Because of these changes and the increased acknowledgement of fiduciary risks for plan sponsors, many sponsors are considering hiring an ERISA 3(38) Investment manager. By hiring this manager plan sponsors transfer the fiduciary responsibilities and risks to the investment manager.

The ERISA 3(38) Investment manager will follow the fiduciary process by:

  1. Developing an Investment Policy Statement (IPS)
  2. Select and Monitor Investment Options
  3. Offer Investment Education

The ERISA 3(38) Investment Manager will minimize their fiduciary liability by choosing index or structured funds.

Who can serve as an ERISA 3(38) Investment Manager?

  1. A bank
  2. An Insurance company
  3. A Registered Investment Advisor (RIA) subject ot the Investment Advisors Act of 1940.

Special note: stock brokers and broker-dealers can never be a 3(38).

Although the plan sponsor (employer) transfers all investment fiduciary risks and responsibilities to the ERISA 3(38) Investment Manager the plan sponsor must monitor the manager. This fiduciary responsibility cannot be delegated away. This entails meeting with the investment manager at least annually and review the process.

Is this for all plan sponsors?

No, however this fits well for small to mid-sized businesses who are too busy running their company to manage a retirement plan. When it fits it works very well. Not only will the plan sponsor outsource a very vital task, the plan participants will benefit from a prudently managed retirement. Ultimately, the goal is a successful retirement for the plan participants including the business owner.

  • 401k Sponsors Increasing Focus on Investments (
  • Retirement Plan Sponsors’ 401(k) Perceptions vs. Reality (
  • What ‘Fee Disclosure’ Rules Really Mean for Plan Sponsors (
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Fiduciary DOL Proposal Puts CFO Liability in Question.

Any plan provider that refuses to agree in writing to serve as the ERISA 3(38) investment manager should be asked why not. Why will they not be accountablefor the investment choices being offered by the plan. The reason in most cases is there is a conflict of interest. Plan sponsors must begin to realize that they must act in the best interest of the plan participants and their beneficiaries. They are personally liable for these decisions.

Fiduciary Trust Building
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For now, CFOs serving as fiduciaries will need to ferret out this information themselves. One easy way to do that is to require that any consultant providing investment advice to the plan fiduciaries specifically acknowledge (in writing) that the consultant agrees to be treated as a fiduciary under ERISA. CFOs with fiduciary responsibility may want to consider implementing that change now. (On a separate note, many CFOs of public companies with retirement plansholding company stock have stepped down from fiduciary committees in light of potential conflicts between securities laws, ERISA, and related “stock drop” litigation.)

The new fiduciary standard for retirement plans will improve the quality of the plans corporations provide for their employees. Corporate executives can improve their plans immediately by asking their plan provider to agree in writing to serve as the ERISA 3(38) Investment manager. This makes the plan provider accountable for the investment choices in the plan.

Please comment or call to discuss how this can help your company offer a true benefit to your employees.

  • What ‘Fee Disclosure’ Rules Really Mean for Plan Sponsors (
  • ERISA Plans’ Ultimate-and Criminal-“Prohibited Transaction” Rule of 18 USC 1954 (
  • Brokerages may have to change business practices: DOL (
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Pension Plan Sponsors

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The retirement system in the USA is the responsibility of every business owner with employees. We cannot rely on the government for our financial future. Relying on the conventional financial institutions is a mistake and will only hurt your employees and increase your risks.

The flurry of enacted and proposed band aide fixes will go part of the way to improving the retirement landscape. But, regulations, legislation and the threat of court action can only go so far. The various fixes provide information and guidance to plan fiduciaries, but by themselves can’t make them better fiduciaries. The plan sponsor must either develop fiduciary practices and procedures or delegate them to someone that can. Plan sponsors are in the business of making widgets or delivering services. Acting as a fiduciary and developing appropriate procedures and practices is generally outside their skill set, and a distraction from their primary interest of running a successful business. Frankly, few businesses rise and fall based on the quality of their 401(k) plan. I’m not suggesting for a moment that they don’t care. Nobody wants to have a crummy retirement plan. Most employers would want for their employees to receive maximum benefits for each dollar set aside. But, wishing won’t make it so. And leaving it to a product pusher that “takes care of it all” is unlikely to generate a quality plan.Long experience indicates that plan sponsors can’t rely on the payroll service/insurance company/brokerage house/or fund company to overcome their deeply embedded conflicts of interest to fix their plans. Those sales entities have little interest and strong disincentives to fiduciary behavior. Most of them absolutely prohibit their agents from accepting fiduciary responsibility. Fortunately, plan sponsors can delegate much of their responsibilities and shed most of their liability to an outside independent investment advisor that will accept fiduciary status in writing (technically ERISA 3(38) Fiduciary). 

This article is spot on. If plan sponsors want to avoid government intervention they must take control of their company retirement plan. The 401(k) system can be fixed but not by the financial institutions listed above.

Please comment or call to discuss how this affects you and your company.

  • Momentum Builds to Place IRAs Under Fiduciary Umbrella (
  • The Use of ERISA § 3(38) Investment Managers in Defined Contribution Plans (
  • Action Can Reduce Fiduciary Risk When Stock Markets Swoon (
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