When Sponsors Want a 3(38) Adviser

Phil Edwards is principal of Curcio Webb, a firm that helps both defined contribution (DC) and defined benefit (DB) plan sponsors identify the provider best-suited to handle their outsourced 3(38) fiduciary investment management.

Besides consulting with plan sponsors, says Edwards, a big part of this business involves working with plan advisers and other entities that supplyEmployee Retirement Income Security Act (ERISA) Section 3(38) investment management services. He says providers in this space regularly re-evaluate their service models to advance client outcomes and improve their own returns, from a business growth and efficiency perspective.

According to Curcio Web Chief Compliance Officer and consultant Elliot Raff, it is rare that a plan sponsor client decides to go down the 3(38) investment outsourcing road and totally misunderstands what it is signing up for in terms of handing over fund menu discretion. But there are occasional misunderstandings about the nitty-gritty details, which can be unsettling for the client and adviser alike. For this reason, Raff highly recommends that advisers moving into the 3(38) space put strong processes and procedures in place—upfront—for dealing with clients’ concerns and questions about their investment menus.

In their experience as 3(38) service matchmakers, Edwards and Raff point to two basic agenda items advisers must fulfill at the start of this type of relationship to prevent misunderstandings and even potential compliance lapses. The first and simpler of the two is to describe, in sufficient and written detail, all of the specific duties and responsibilities they, as the 3(38) provider, are taking on; also detail in the same specific manner which responsibilities will remain with the plan sponsor client.

“We make sure to work with our clients to go way down into the weeds and create a very clear understanding of who is responsible for what decisions and on what time frames,” Edwards says. “That clarity is critical. Of course, sometimes it’s going to be an evolving situation, especially with very large plans that may decide to do almost a trial period, where they delegate increasing portions of the responsibility to the 3(38) provider over time as confidence increases. This type of thing should also be clarified.”

The second and more subtle agenda item, he says, is to ask clients, “What is the objective of the retirement plan, and how will outsourcing the investment management support that goal?”

“The adviser and the client must be able to answer the question: ‘What goals are you managing to, and how will 3(38) service be beneficial?’” Edwards says. “This is important for DC plans but especially for DB plans that are bringing in an outsourced chief investment officer [OCIO]. DC plans have a more straightforward and open-ended objective of growing participant accounts, while DB plans have much more variability in terms of time horizons and goals.”

Raff also emphasizes making sure that plan sponsor clients know the retirement plan committee must still remain highly active.

“Plan sponsors must take as much time as necessary to understand these issues,” Raff says. “Advisers can help guide them by asking, ‘What are the functions you want to hold onto? What functions are you comfortable handing over?’”