Why retirement plan advisers should act as 3(38) investment fiduciaries

Why retirement plan advisers should act as 3(38) investment fiduciaries
And why they should charge plan sponsors less for the service.
DEC 05, 2019
A year ago, we reviewed 3(21) versus 3(38) ERISA investment fiduciaries and asked which was better. Now it seems clear that 3(38) is better, at least for advisers, and that rather than charge more or the same for acting as a 3(21) fiduciary, advisers should charge less. Here's why. To review, advisers acting as a 3(21) fiduciary for defined-contribution plans make investment recommendations providing advice but the ultimate decision still lies with the plan sponsor. On the other hand, a 3(38) exercises full control. Some advisers have no option other than to use their broker-dealer's 3(38) fiduciary service, based mainly on the adviser's level of experience, as a way to minimize risk and simplify the investment selection process. But more and more experienced retirement plan advisers are moving to 3(38) services, with a few charging less than for 3(21) services, because it allows them to simplify their investment review and selection process. If every plan has a different investment lineup, it's more work to monitor them all. It's also more difficult when a fund needs to be replaced, especially if there's a need to act fast. A simplified investment menu saves time for the advisers, allowing them to focus on more important issues like plan design and participant engagement. [Recommended video: Pershing's Christina Townsend: Advisers want personalized digital solutions for clients]​ Some advisers still charge more to act as a 3(38) fiduciary, claiming that greater liability deserves higher fees. Though some experts predict that lawsuits will move down-market with advisers as a target, there's little precedent for higher judgments or settlements against 3(38) fiduciaries than their 3(21) counterparts. Some plan sponsors may want to retain the ultimate decision about which funds should be offered because they know their employees better but most are more than happy to delegate decisions and limit their liability, saving precious time. Makes sense — it's why they hire an expert co-fiduciary. [More: Convergence of retirement planning and employee benefits is here]​ All of which raises the question of whether one investment menu is right for all plans. 3(38) advisers should exercise some flexibility by offering an investment line-up that includes index and active funds.Not all target-date strategies are equal, so following the Department of Labor's "Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries," the adviser should consider the needs and demographics of the plan sponsor. Either way, the adviser can simplify the investment process by using the same building blocks that can be cobbled together differently depending on the needs of the client by acting as a 3(38) fiduciary. One implication of this more centralized decision-making process by 3(38) advisers is that investment companies or defined-contribution investment-only firms may have fewer opportunities to win new mandates. Rather than selecting investments on a plan-by-plan basis, advisers may make periodic decisions on the base lineups and underlying building blocks. Defined-contribution plans are attractive because the assets are sticky, but that also makes it harder for new firms to enter the market or make short-term gains. More record keepers, broker-dealers and RIAs are offering 3(38) protection. We expect more advisers, especially experienced retirement plan advisers, to follow suit to streamline their processes while charging clients less for the service. [More: Is the 401(k) adviser M&A market about to cool down?]Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.

Latest News

RIA moves: NorthRock adds $800M Parkside Advisors, NFP acquires Levine Group in Tennessee
RIA moves: NorthRock adds $800M Parkside Advisors, NFP acquires Levine Group in Tennessee

NorthRock Partners' second deal of 2025 expands its Bay Area presence with a planning practice for tech professionals, entrepreneurs, and business owners.

Hightower taps Osaic alum Scott Hadley as first chief advisory officer, expands C-suite
Hightower taps Osaic alum Scott Hadley as first chief advisory officer, expands C-suite

Hadley, whose time at Goldman included working with newly appointed CEO Larry Restieri, will lead the firm's efforts at advisor engagement, growth initiatives, and practice management support.

Clients are nervous about volatility, but advisors know they need to stay the course
Clients are nervous about volatility, but advisors know they need to stay the course

Survey reveals how cutting through the noise is advisors' superpower.

Why the 'forgotten generation' is a powerful force in wealth management, consumerism
Why the 'forgotten generation' is a powerful force in wealth management, consumerism

Gen X is a powerful cohort that controls huge wealth but also faces retirement challenges.

RIA moves: True North adds $353M California RIA as SageView grows North Carolina presence
RIA moves: True North adds $353M California RIA as SageView grows North Carolina presence

Plus, a $400 million Commonwealth team departs to launch an independent family-run RIA in the East Bay area.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.