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Sunday, December 15, 2019

WHY SHOULD YOU BE A 3(21) OR A 3(38) FIDUCIARY?

One of the biggest incentives for plan sponsors to seek a fiduciary to assist with their retirement plan is to share the burden of providing sound advice to all participants enrolled in the plan. Since 2009, shortly before the Department of Labor started requiring providers to more clearly disclose their fees via the 408(b)(2) rule, roughly 83,000 ERISA lawsuits have been filed in federal district courts.  Poor performance or high fees can be grounds for litigation. As a matter of fact, plans suffering from high fees or poor investment returns are common enough that they’ve given rise to their own litigation industry. As a plan sponsor, you have a fiduciary duty to act in the best interest of your participants but it does not have to be alone. The investment advice and management can be a full-time job that requires extensive knowledge and expertise. In the case where the plan sponsor does not have these skills, finding the right person or company becomes necessary. A 3(21) or 3(38) adviser can come to the rescue but, you will need to understand the difference to make an appropriate choice from these two options. Essentially a 3(21) fiduciary will be helping the plan sponsor to pick and monitor their fund menu, but all final decisions are made by the plan sponsor themselves. They are the final decision maker when it comes to plan-related decisions. A 3(38), however, will not only put together the investment menu, but is authorized to make decisions on it. They do not need to first clear it with the plan sponsor. Therefore, a 3(38) has a lot more responsibility to the plan than a 3(21) may have. Whether as an advisor you want to act as a 3(21) or 3(38), there are some clear advantages and disadvantages to both. For example, as a 3(38):
  • It is quicker to make investment decisions themselves rather than having to meet and obtain approval from the plan sponsor.
  • If an adviser is exclusively a 3(38) then the number of funds which will need to be monitored will drop dramatically. As a 3(38) will only have to monitor the funds which they have chosen. But a 3(21) will have to monitor every fund chosen by all the plan sponsor they work with.
  • There seems to be a trend towards greater fiduciary responsibilities for advisers and acting as a 3(38) may get you ahead of the curve.
  • There can be  a selling point that they are taking the risk off the plan sponsor who are increasingly wary of fiduciary risks.
  • However, some drawbacks may be that despite providing the service at a premium price to outsource fiduciary risk, this could create a new risk for the plan sponsors. For example, as the fees for participants may become higher, even when the participants may not be receiving any visible benefit.
Overall, when it comes to figuring out what type of fiduciary is right for a plan sponsor, they will need to ask themselves a few questions as well:
  • Would you like to be involved in managing your plan’s investments? If yes, then you need to get a 3(21) fiduciary, who will share their advice and will let you decide what you should do with your investments.
  • How busy are you? If you don’t have time to meet regularly, monitor the investment performance, listen to the recommendations, etc. you will need a 3(38) fiduciary, who will do most decision-making for you
  • Do you want to get as much fiduciary protection as possible? If yes, then a 3(38) is what you will need, because their level of fiduciary responsibility is much higher than of a 3(21) fiduciary.
Being able to understand the questions and needs of a plan sponsor will lend itself to making sure you are able to provide the right service to plan sponsors. Do they need a 3(21) or a 3(38)? While you may specialize in one particular fiduciary area, understanding the needs of the client is paramount. As an adviser, you should be sure to tailor the kind of fiduciary service you offer to your client for their situation and needs.

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    It’s difficult to find experienced people for this subject, however, you seem like you know what you’re talking about! Thanks

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