Investment Discretion

In general, most retirement plan advisers are familiar with the 3(21) relationship: The adviser is responsible for the advice that he gives, and the plan sponsor is responsible as a co-fiduciary for acting on that advice. However, not many retirement plan advisers are able to serve in a 3(38) fiduciary status, where the person who appoints the 3(38) has a fiduciary obligation to exercise due diligence in the appointment and future monitoring, but the actual investment decisions are made by the 3(38). Joe Frustaglio, vice president of private-sector retirement plan sales for Nationwide Financial; Chuck Rolph, director in the Advanced Consulting Group for Nationwide Financial; and Dick Friedman, managing director of Corporate Retirement Services for IRON Financial, spoke with Alison Cooke Mintzer, editor-in-chief of PLANADVISER, about the 3(38) fiduciary responsibility and how advisers can use outsourced 3(38) fiduciaries to add value to their practices and their clients.

PA: Why are plan sponsors interested in outsourcing some of their fiduciary responsibilities?

Frustaglio: Sponsors have always expressed that managing fiduciary risk is a challenge, but given the growing importance of defined contribution (DC) assets and increased regulatory scrutiny, sponsors are looking for ways to improve plan performance while minimizing risk. Hiring outside experts often helps them achieve both goals.

PA: What is a 3(38) outsourced responsibility? What does that entail and what is turned over, if you will?

Rolph: Under Section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA), the fiduciary of the plan appoints an investment manager and gives that manager the authority to direct, monitor and select investment options for a retirement plan. By doing so, the plan fiduciary transfers the associated responsibility and liabilities to that third party, the ERISA Section 3(38) fiduciary. Part of what the 3(38) fiduciary does is develop the investment policy statement (IPS), make the investment selections, and then review those investments with the plan fiduciary that appointed the 3(38) on a regular basis.

PA: What are the options for a retirement plan adviser that wants to offer 3(38) services to its plan sponsor clients?

Rolph: ERISA is very specific in terms of what credentials a person must have in order to serve as a 3(38) fiduciary, and makes the point that a 3(38) fiduciary has to be a bank, insurance company or registered investment adviser (RIA)—somebody who’s subject to the Investment Advisers Act of 1940. So, for advisers who want to offer this service to their plan sponsor clients, the adviser either has to be an RIA or partner with a bank, insurance company, trust company or RIA.

PA: For those who need to partner with one of those entities to offer such services, what is the value for a retirement plan adviser of partnering with a 3(38) manager?

Friedman: Partnering with a 3(38) allows the adviser to concentrate on other critical areas of plan governance, and allows for a shift in the role of the adviser to that of a “plan quarterback.” It can also enable advisers to grow their practices with other revenue models, such as ancillary wealth management services and individual retirement account (IRA) rollovers, that they would have a hard time doing if they were engaged as the investment fiduciary.

PA: How does an adviser go about selecting a 3(38) manager partner?

Friedman: There are a couple of critical factors. First, advisers need to make sure they engage a plan-level 3(38) fiduciary and not a participant-level 3(38) fiduciary. Second, the adviser must look for a 3(38) fiduciary that can provide differentiated deliverables. Personalized deliverables have the ability to keep an open line of communication between the adviser and the plan sponsor. To that end, we want the plan to have plan-specific investment policy statements, plan-specific quarterly fiduciary reports and added-value educational newsletters. There’s an old saying, “Out of sight, out of mind.” When you have differentiated deliverables like that, you give the adviser the opportunity to be front and center to the plan sponsor.

Another critical factor is competence. Most ERISA attorneys caution plan sponsors that hiring an imprudent 3(38) does not mitigate risk but can actually add to it. So, advisers should look for industry confirmation of the investment process that the 3(38) employs. Lastly, independence—although it may be legally permissible to use proprietary funds, when you do so you have opened an area of constant debate. We don’t want anybody to view the 3(38) fiduciary service as anything but independent, offering the strongest mitigation of liability.

PA: How can an adviser leverage the 3(38) service deliverable to add value both to his advisory process and to the plan sponsor client?

Frustaglio: By outsourcing the investment selection and monitoring duties, advisers free themselves up to drive overall plan performance by spending less time researching investments and more time working with their plan sponsor clients and participants.

Friedman: An adviser has to look at what best fits both that plan sponsor and that adviser. Unlike 3(21) fiduciary services, a 3(38) fiduciary can let the business owner concentrate on running his or her business while an expert takes care of the investment lineup and the related liability.

What does the adviser want to do? Does the adviser want to serve in a fiduciary capacity or bring other elements of value into that equation that he can only do as a non-fiduciary? In a non-fiduciary role, advisers may do education and enrollment meetings, assist the plan sponsor in plan governance and monitoring service providers—all things that are critical to the success of a plan.

Rolph: Advisers need to ask themselves: Do they want to act in a fiduciary capacity, or do they want to clearly delegate that responsibility so they can focus on driving plan performance and practice growth?

The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB, a division of Nationwide Bank. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.

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