Our industry appears to be limping through a mountain of new
documentation. Everybody—at least plan sponsors, trustees, providers, advisers
and attorneys—seems desirous of making a
difference for plan participants through a “3(38) relationship.”
What is a 3(38) relationship? That really doesn’t matter
right now. What does matter is that not many providers, advisers or plan
sponsors understand it, but many of your competitors think that your plan
sponsor client needs to hear about it, understand it and take full advantage of
everything such a relationship has to offer. I know that our competitors feel
that way!
The 3(38) relationship is old language defining the capacity
in which an investment manager will serve. Again, what matters is, while the
language is old, the concept is newly packaged … and, everybody is doing it!
This One Is Different
We have seen this pattern of behavior before. When I say
this, I am referring to the fact that plan sponsors have purchased “things”
that were not in the best interest of the plan, not in the interest of plan
participants, not in the interest of the asset allocations that were prudent …
but they were new and exciting when purchased. Within the last six months, I
have looked at a collection of 3(38) products and services from a variety of
vantage points, including that of a 3(38) investment adviser acting as a
fiduciary analyst, a marketing consultant and a 401(k) consultant. From this
experience, I have recognized that, again, plan sponsors are purchasing “that
which they do not comprehend,” and they are doing so “without taking to heart
the documentation” they are being asked/required to sign. In many cases, no one
in his right mind would agree to the terms and conditions being presented in
such arrangements.
As easy as it is to espouse and enumerate such points, they
often fall on deaf ears, as they did in the 1990s, when a small group of us
were trying to take the fiduciary argument to the street. Very few people
cared.
This time should be different because we recognize the
scenario. All of our behavioral finance indicators point to the fact that
people (plan sponsors) will purchase that which they do not understand (the
3[38] protection concept) if certain people (industry professionals) advise
them to do so. Stated another way, plan sponsors rely on professionals when
making decisions about their retirement plans. Because of that, I am attempting
to connect with advisers in a completely different manner. It might work, it
might not. Among those with whom I have tested this, the response has ranged
from OK to good. I offer it to you. If a plan sponsor does not fully comprehend
this “3(38) warning,” then you have an opportunity to help them to do so—and
this becomes part of your value add. Each line of the accompanying poem appears
for a specific reason or protection. Again, you can find many examples or
scenarios that make these points, but see whether you feel that your plan
sponsor clients or prospects would “get it,” as the 3(38) relationship is
underscored in these phrases.