chalk talk | PLANADVISER April/May 2012

Forging Ahead

Making an impact in the wild and wooly world of 3(38) relationships

By Steff C. Chalk | April/May 2012
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Our industry appears to be limping through a mountain of new documentation. Everybody—at least plan sponsors, trustees, providers, advisers and attorneys—seems  desirous of making a difference for plan participants through a “3(38) relationship.”   

What is a 3(38) relationship? That really doesn’t matter right now. What does matter is that not many providers, advisers or plan sponsors understand it, but many of your competitors think that your plan sponsor client needs to hear about it, understand it and take full advantage of everything such a relationship has to offer. I know that our competitors feel that way!

The 3(38) relationship is old language defining the capacity in which an investment manager will serve. Again, what matters is, while the language is old, the concept is newly packaged … and, everybody is doing it!

This One Is Different 

We have seen this pattern of behavior before. When I say this, I am referring to the fact that plan sponsors have purchased “things” that were not in the best interest of the plan, not in the interest of plan participants, not in the interest of the asset allocations that were prudent … but they were new and exciting when purchased. Within the last six months, I have looked at a collection of 3(38) products and services from a variety of vantage points, including that of a 3(38) investment adviser acting as a fiduciary analyst, a marketing consultant and a 401(k) consultant. From this experience, I have recognized that, again, plan sponsors are purchasing “that which they do not comprehend,” and they are doing so “without taking to heart the documentation” they are being asked/required to sign. In many cases, no one in his right mind would agree to the terms and conditions being presented in such arrangements.   

As easy as it is to espouse and enumerate such points, they often fall on deaf ears, as they did in the 1990s, when a small group of us were trying to take the fiduciary argument to the street. Very few people cared.

This time should be different because we recognize the scenario. All of our behavioral finance indicators point to the fact that people (plan sponsors) will purchase that which they do not understand (the 3[38] protection concept) if certain people (industry professionals) advise them to do so. Stated another way, plan sponsors rely on professionals when making decisions about their retirement plans. Because of that, I am attempting to connect with advisers in a completely different manner. It might work, it might not. Among those with whom I have tested this, the response has ranged from OK to good. I offer it to you. If a plan sponsor does not fully comprehend this “3(38) warning,” then you have an opportunity to help them to do so—and this becomes part of your value add. Each line of the accompanying poem appears for a specific reason or protection. Again, you can find many examples or scenarios that make these points, but see whether you feel that your plan sponsor clients or prospects would “get it,” as the 3(38) relationship is underscored in these phrases.