Employers often turn to their financial advisors to help them handle key responsibilities. Since navigating the legalities and complexities of retirement plans is typically not something they have experience doing, it’s natural for businesses to offload many of the associated tasks required for proper plan administration.

This is where a 3(38) fiduciary steps in.

While an advisor may welcome the business relationship of being assigned as the 3(38) fiduciary, it’s also important to understand the responsibilities, legal implications and risks involved with performing the role.

What is a 3(38)?

The admittedly confusing nomenclature comes from the Employee Retirement Income Security Act (ERISA) of 1974. In section 3(38) of ERISA, the term investment manager is defined. It’s actually a short section, and the full text is below:

(38) The term ‘‘investment manager’’ means any fiduciary (other than a trustee or named fiduciary, as defined in section 402(a)(2))—

• (A) who has the power to manage, acquire, or dispose of any asset of a plan;
• (B) who (i) is registered as an investment adviser under The Investment Advisers Act of 1940; (ii) is not registered as an investment adviser under such Act by reason of paragraph (1) of section 203A(a) of such Act, is registered as an investment adviser under the laws of the State (referred to in such Paragraph (1)) in which it maintains its principal office and place of business, and, at the time the fiduciary last filed the registration form most recently filed by the fiduciary with such State in order to maintain the fiduciary’s registration under the laws of such State, also filed a copy of such form with the Secretary; (iii) is a bank, as defined in that Act; or (iv) is an insurance company qualified to perform services described in subparagraph (A) under the laws of more than one State; and
• (C) has acknowledged in writing that he is a fiduciary with respect to the plan.

What does it all mean? Let’s dive in.

With Great Power, Comes Great Responsibility

While you may charge a premium for performing the 3(38) role, you may not wish to take on the added risk of fulfilling much of the ERISA plan employer's legal requirements. This is especially true for smaller plans where you may not be able to make the business case for the services involved. It’s worth considering the amount of business you’ll be providing in relation to the responsibility that comes with it.

As a 3(38) fiduciary, you are committing to serve as the formal investment manager for an employer’s plan. As such, you will be required to provide regular fiduciary reports to the employer and document your rationale for investment and fund change recommendations as well as any time you execute on said recommendations.

Adherence to IPS

With the addition of full investment discretion, you must document that you are adhering to the plan’s Investment Policy Statement (IPS), and that all investment decisions are made in the plan participants’ best interests. You may even be asked to help develop an IPS. Importantly, as a 3(38) fiduciary, your processes and methods must be that much more detailed and circumspect than those of a 3(21) fiduciary.

Expertise Required

Being a 3(38) fiduciary is a specialized role that requires specialized expertise. Advisors who dabble in the 401(k) space and advise only a few plans may not wish to take on the responsibility—and liability—required. Fortunately, that’s where external providers can help with the heavy lifting. Integrated solutions now offer you the option to offload certain levels of fiduciary liability while still putting the power in the advisor’s hands to personally guide clients with their retirement decisions. We recommend exploring how these options ease the fiduciary liability you carry while giving your sponsors and participants the customized plans and advice they value most from their trusted advisor.