Forging Ahead

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.

A 3(38) Warning
Observations of an investment adviser 

The dizzying lines of blurred demar(k)tion
Percolate up, throughout 401(k)-Nation;
Plan sponsors, en masse, have awakened to the fact
3(38) Investment Relief is “OK by ERISA,” as defined in the act.

Investment protection for plan sponsors—it’s attractive,
Trustees intoxicated by the prospect of being less active;
Is that correct—can trustees now sit back and relax?
What of “the duty to monitor” the 3(38)’s acts?

The plan sponsor laments, “I have done all I can;
I have hired the biggest 3(38) I could find … the best in the land!”
Plan sponsors for years have felt overly exposed;
But the safe harbors they seek may, one day, bloody their nose.

Take nothing on faith, read all that you can;
Participant balances always reflect the trustee’s guidance and hand.
Know the fine line where demar(k)tion occurs;
It is only your 3(38) documentation that can remove all the blurs.

Used with permission of Steff C. Chalk. Copyright  Steff C. Chalk 2012 

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.