Fiduciary Responsibility: 3(38) Services Set to Increase

Jean Duffy, a senior vice president at CAPTRUST, shared in a Wednesday webinar that an increasing number of clients are choosing a 3(38) investment manager and handing them “the keys of the car,” instead of staying with a 3(21) designated adviser.

As Duffy noted, in a 3(21) investment adviser relationship, the adviser makes investment recommendations to a plan’s retirement committee. The plan sponsor or the committee then makes the final decision on the investments and owns the liability for that decision.

With a 3(38), per the Employee Retirement Income Security Act, the investment adviser takes responsibility, Duffy said, for the final decision on the investments and owning the liability.

“This really represents the highest level of investment liability transfer possible under ERISA,” she said. “I like to explain this to my committees: A plan sponsor is basically turning the keys of the car over to, me and I’m driving. I’m deciding which turns we’re making, where we’re stopping, when we’re going.”

The 3(38) option is growing in popularity in part due to the growth of 401(k) plan litigation and an increased focus on being protected from fiduciary risk. But, Duffy noted, the plan sponsor committee still has the responsibility to monitor its service provider to ensure it is doing a good job.

“It doesn’t mean that they have to second-guess the investment decisions,” Duffy said.
“They just have to be responsible for making sure that we’ve done what we’ve said we’re going to do by serving as that 3(38) investment manager.”

Duffy agreed that the shifting of the fiduciary responsibility is the most notable advantage for clients in using a 3(38) investment manager, given recent lawsuits, litigation and heightened scrutiny from the legislative side.

“Many plan sponsors are looking for ways to protect themselves, and the 3(38) investment manager is one way that they can do that, especially if they’re not comfortable making those investment decisions,” she said.

The CAPTRUST webinar also covered other topics on fiduciary roles and responsibilities in retirement plans.