A 3(38) Fiduciary Could be Your 401K Plan’s Not So Secret Weapon

Posted: Apr 23, 2020 4:00:00 PM

unicornIf anything, an abrupt market correction like we've seen with this pandemic is an opportunity for plan sponsors to reassess the need for a 3(38) fiduciary. While often overlooked in a lengthy bull market, the role of a 3(38) fiduciary is to ensure procedural due diligence, select 401k plan investment funds and provide advisory services to the plan sponsor in accordance with ERISA.

A 3(38) fiduciary relieves plan sponsors of some important duties, however, the main responsibility for oversight still lies with the employer who made the decision to choose the fiduciary in the first place. Therefore, it’s imperative to choose your fiduciary wisely as the arrival of a bear market will likely invite even more opportunities for financial instability for plan participants and subsequently more liabilities for plan sponsors. 

Not all 3(38) fiduciaries are created equal. The best ones come armed with a proven investment process that protects plan assets and produces measurable results quantified in plan participation and participant outcomes.

Lyle Himebaugh, partner at Granite Group Advisors and a 3(38) fiduciary well-versed in ERISA law, discusses how plan sponsors can be diligent about selecting a fiduciary partner that adds real value.

  1. What types of plan sponsors should actively seek a 3(38) fiduciary?

Whether a plan sponsor has an investment committee or not, all plans should have a professional investment advocate who acts as another important checkpoint in fiduciary oversight. The plans that are most vulnerable are the ones that do not have a formal investment process written in their Investment Policy Statement (IPS). The plan sponsor creates on IPS to set guidelines for important decisions made to a plan by fiduciaries, trustees and investment managers. Within the IPS, an investment process will ensure that selected funds are aligned with employer and employee goals and closely monitored with changing market dynamics.

  1. Where does the retirement role of a plan sponsor end and a 3(38) begin?

From the onset, the plan sponsor and 3(38) will form a partnership to establish the needs of the plan. A valued 3(38) will assess what investment features should be put in place by speaking with the employer or its representatives. Once the investment mix is set, it’s up to the 3(38) fiduciary to review often, ideally on a quarterly basis. It’s even more important that the 3(38) is available to answer employer and employee questions. If done right, the value a 3(38) can bring to a 401k plan is limitless.

  1. What should a plan sponsor look for in a qualified 3(38)?

An employer should be comfortable and well versed with the investment process of their 3(38). Questions such as “how do you pick funds? what are your fees? what services are not covered in your fees that may be an additional cost?” are essential for full transparency. A valuable 3(38) will have a clear and consistent communication platform so both the employer and the employees understand why certain funds are selected as well as how to determine a personal allocation.  

  1. How can a plan sponsor verify the credentials of a 3(38)?

Due diligence is the key in qualifying a 3(38). Ask a 3(38) for references and be prepared with questions that will address your specific needs. Depending on designations like AIF or CIMA is not a foolproof test of anyone’s knowledge or expertise. A reliance instead on first-hand satisfaction from a few plan sponsors is your best vote of confidence. 

  1. Where do you see the value add of a 3(38) as we exit this pandemic?

The role going forward will be vital. Many employers will be looking to rebuild their business. They will need a higher service level to make sure their retirement plan stays compliant so they can stay focused on their business. They will need a 3(38) that will deliver better employee engagement including virtual meetings with employees and one-on-one conversations.

Employees look for guidance, especially in stressful times. Our solution several years ago was to create an investment education site accessible anytime and anywhere. That has proved invaluable to our clients in times like these as each company has a personalized login and every employee gets a personal allocation solution. When questions arise, employees can call GGA at any time for investment help. As a 3(38), this is part of our fees and plan sponsors should expect these types of services and solutions from their provider.

  1. How can a plan sponsor avoid some of the pitfalls we are seeing in the market now?

A clear communications strategy is key in times of crisis. More communication is necessary to reassure employees about their plan benefits and options. A full understanding of how a fund lineup is constructed as well as new services available will more likely than not prevent employees from making impulsive decisions in their retirement planning.

As the markets fall, we believe that lawsuits will flourish as employees sharpen their pencils. Employers need to be prepared to answer any inquiry as a plan fiduciary and investment fiduciary, especially if there is no other investment fiduciary to help shoulder scrutiny.

  1. What should be the first step in working with a 3(38)?

The first step when accessing a 3(38) is to understand how they operate and what services they bring to the table. Not all 3(38)s are equal. Some wholesale 3(38)s just supply a fund lineup, which is really just the first step in the process. To be fully protected, an employer needs conduct thorough due diligence on the 3(38) before deciding on the hire.