Hidden Positives

Art by Veronica Cerri

Jeff Gratton, managing director and chief marketing officer at SageView Advisory Group, has found that his clients want to rely on a 3(38) fiduciary so they have more time to concentrate on running their business. Indeed, it does appear that plan sponsors increasingly use the services of 3(38) fiduciaries to offload the work of selecting and monitoring plan investments. The 2020 PLANSPONSOR Defined Contribution (DC) Survey found, in fact, that 40% of plans work with such an adviser.

“Turning to a 3(38) is a way for plan sponsors to reduce some of their risks in terms of fiduciary duties,” notes George Michael Gerstein, ERISA [Employee Retirement Income Security Act] counsel and co-chair of the fiduciary governance group at Stradley Ronon. “Relying on a 3(38) investment manager who can make discretionary decisions on investment lineups is appealing, due to the widespread class action lawsuits against retirement plans that we’ve seen,” he says. “There’s [growing] understanding among the plan sponsor community about this benefit of using a 3(38). This could be very appealing to those sponsors that don’t feel they have the investment expertise.”

Many retirement plan advisers are figuring out how to integrate 3(38) services into client offerings, whether in-house or working with a third party, which enables them to focus more strategically with the sponsor on plan design and retirement readiness, industry insiders say.

“We specialize in conducting searches for advisers to subcontract 3(38) services [for our plan sponsor clients],” says Jim Scheinberg, founder and chief investment officer (CIO) at North Pier Search Consulting. “We follow up a year or two later and inevitably discover the committee has been freed up to focus on more tactical issues that affect participant outcomes—key elements such as plan design, participation and participant education. Before, committees would spend a finite amount of time on these critical factors, which actually move the needle in terms of outcomes and preparedness.”

Still, cautions Michael Goss, managing partner at Fiducient Advisors, it is incumbent on the adviser to steer his client in a more dynamic direction, versus merely a collaborative process with the committee. “I’ve seen 3(38) clients come to the exact same place as those without a 3(38),” Goss says.

Flip the Committee Narrative

Without the benefit of a 3(38) fiduciary, retirement plan committees sometimes give key plan design decisions the short shrift, says James Sampson, director of Hilb Group Retirement Services. “[As a 3(21) adviser], if we did an hour-long committee meeting, we’d spend 50 or 55 minutes on the investments and be left with just five to 10 minutes to talk about employee education, increasing participation, financial wellness and customized metrics,” Sampson says. “These ideas, as important as they are, would be shoved in almost like a footnote. Now we can flip that around and talk about the changes and the benefits we’ve made for them and spend the bulk of the meeting on action items. The investment part is the boring part. The rest of it is fun.”

Acting as a 3(38) is also far easier for advisers, enabling them to both control the investment process and streamline fund lineups, introducing efficiencies, Sampson says. “When we see that a fund is up for replacement, we can make that change across our book of business, as opposed to going through the meeting notes and getting their approval, which can take one to three months,” he says. “As soon as we have our internal 3(38) committee meeting, we can make those changes.”

3(38) Business Pricing

Some 3(38) advisers charge up to 20% more, as they feel they are taking on added discretionary risk, Scheinberg says. However, some charge the same as 3(21) fiduciaries, as they feel they are doing the same amount of work, and some even charge less, he says. The fees can be flat or asset based, but just because a plan has more assets does not make it linearly deserving of a higher fee, he says.

The discretionary services that 3(38) fiduciaries provide vary widely and should be charged accordingly, Scheinberg says.