The Department of Labor (DOL) conflict of interest rule provides a tailwind for the adoption of outsourced fiduciary services in the defined contribution (DC) plan market, according to the latest research from Cerulli Associates.
“Today, it can be difficult to have a DC-related conversation without someone using the terms ‘3(21)’ or ‘3(38),’ which have become DC industry shorthand for nondiscretionary versus discretionary advice,” states Jessica Sclafani, associate director at Cerulli. “Because of the growing awareness of the role and responsibilities of a fiduciary—among plan sponsors and their intermediaries—there is more attention being paid to fiduciary service providers that will act in an ERISA [Employee Retirement Income Security Act] 3(21) or ERISA 3(38) capacity relative to a DC plan’s fund lineup.”
There is a spectrum of fiduciary services offered to DC plans, according to Cerulli. “Baked in” 3(21) and 3(38) fiduciary services embedded in the recordkeeper platform are more common to plans with less than $5 million in assets. “Baked in” refers to when a recordkeeper will engage a provider to conduct further due diligence on the investment options available on a given platform to generate a narrowed list of funds for which the provider will serve as an ERISA 3(21) or ERISA 3(38) co-fiduciary. Providers are typically Envestnet, Mesirow, Morningstar and Wilshire, and products are typically off-the-shelf with a low-touch service model.
For the $5 million to $500 million DC plan market, advisers and consultants offering 3(38) discretionary investment advice are more common. Providers are typically retirement specialist advisers and consultants as well as boutique DC conultants, using a medium-touch service model.
For DC plans with greater than $500 million in assets, the OCIO model is most common, using full customization built for specific plans. These are high-touch service models delivered by Tier-1 investment consultants, such as Callan, Mercer, NEPC and Willis Towers Watson, to name a few.Information about purchasing the report, U.S. Retirement Markets 2017: The Rise of Fiduciary Services, is available here.