At the Helm: Advisers and Clients Embrace 3(38) Services

The retirement planning world has moved steadily toward 3(38) fiduciary investment management services, driven by the shared preferences of plan sponsors and advisers.

Art by Tim Peacock


Industry experts agree more retirement plans are selecting “3(38) fiduciary investment management” services from their advisers over “3(21) fiduciary advice services,” and they suggest this trend is not only more beneficial for sponsors and advisers, but for participants as well.

“Originally, the more limited 3(21) fiduciary services were the norm, primarily because the companies advisers were affiliated with didn’t want them to make the final, discretionary decisions as to what a client’s investment lineup should be,” explains Aaron Schumm, chief executive officer of Vestwell. “So, advisers would basically provide sponsors with a list of investment options that they and the sponsor could agree upon—but the sponsors and participants were ultimately left to make their own elections.”

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Today, however, the world has moved toward 3(38)-level service, Schumm says, wherein the adviser actually makes discretionary choices about a client’s investments.

“Vestwell supports both models, but 99% of our client base is weighted to 3(38) services, and that is because people want more than advice,” Schumm says. “When it comes to participants, 3(38) services can offer more value for those who are not financially savvy, and in a market like this, that could have significant impact.”

George Michael Gerstein, co-chair of the fiduciary governance group at Stradley Ronon Stevens & Young, also says sponsors have come to prefer 3(38) fiduciary services over 3(21) fiduciary services, “because it gives them the greatest legal protection.”

“For a few years now, advisers have been seeing more growth and interest in 3(38) services,” Gerstein says.

The Adviser Perspective

Certainly, one of the reasons why 3(38) services are more in demand is because advisers prefer them to 3(21) services.

“As many advisers look at the difference between the two models, they realized that even if they were a 3(21) fiduciary, in many cases they were essentially providing the full services of a 3(38),” says Greg Porteous, head of defined contribution (DC) intermediary business at State Street Global Advisors.

“Also,” Porteous continues, “from the adviser standpoint, it takes away a lot of the processes and administrative burden they would have to go through in terms of getting the fund committee’s permission to make a necessary fund change. 3(38) fiduciaries still have to answer to the committee, but not for a simple fund change. As a 3(21), you have to do a good deal of education for the committee, in some cases helping them understand the difference between a stock and a bond.”

Yet another factor driving interest in 3(38) services is that many advisory practices are centralizing these services in the home office, or white-labeling them, making it easy for advisers to offer turnkey 3(38) services, Porteous says.

As to whether the Regulation Best Interest (Reg BI) rulemaking package from the Securities and Exchange Commission (SEC) and state efforts to enforce fiduciary rules are also driving this interest, Gerstein says their impact has been minimal. “These efforts are mostly focused on broker/dealers’ standard of care, that they are giving nondiscretionary investment advice,” he says. “To offer 3(38) services, you have to be a registered investment adviser [RIA], licensed under the Advisers Act or a bank or insurance company regulated by state law.”

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