Investment Discretion

What advisers should know about 3(38) fiduciaries, and how they can broaden adviser value and client service.
L to R: Frustaglio, Rolph and Friedman

In general, most retirement plan advisers are familiar with the 3(21) relationship: The adviser is responsible for the advice that he gives, and the plan sponsor is responsible as a co-fiduciary for acting on that advice. However, not many retirement plan advisers are able to serve in a 3(38) fiduciary status, where the person who appoints the 3(38) has a fiduciary obligation to exercise due diligence in the appointment and future monitoring, but the actual investment decisions are made by the 3(38). Joe Frustaglio, vice president of private-sector retirement plan sales for Nationwide Financial; Chuck Rolph, director in the Advanced Consulting Group for Nationwide Financial; and Dick Friedman, managing director of Corporate Retirement Services for IRON Financial, spoke with Alison Cooke Mintzer, editor-in-chief of PLANADVISER, about the 3(38) fiduciary responsibility and how advisers can use outsourced 3(38) fiduciaries to add value to their practices and their clients.

PA: Why are plan sponsors interested in outsourcing some of their fiduciary responsibilities?

Frustaglio: Sponsors have always expressed that managing fiduciary risk is a challenge, but given the growing importance of defined contribution (DC) assets and increased regulatory scrutiny, sponsors are looking for ways to improve plan performance while minimizing risk. Hiring outside experts often helps them achieve both goals.

PA: What is a 3(38) outsourced responsibility? What does that entail and what is turned over, if you will?

Rolph: Under Section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA), the fiduciary of the plan appoints an investment manager and gives that manager the authority to direct, monitor and select investment options for a retirement plan. By doing so, the plan fiduciary transfers the associated responsibility and liabilities to that third party, the ERISA Section 3(38) fiduciary. Part of what the 3(38) fiduciary does is develop the investment policy statement (IPS), make the investment selections, and then review those investments with the plan fiduciary that appointed the 3(38) on a regular basis.

PA: What are the options for a retirement plan adviser that wants to offer 3(38) services to its plan sponsor clients?

Rolph: ERISA is very specific in terms of what credentials a person must have in order to serve as a 3(38) fiduciary, and makes the point that a 3(38) fiduciary has to be a bank, insurance company or registered investment adviser (RIA)—somebody who’s subject to the Investment Advisers Act of 1940. So, for advisers who want to offer this service to their plan sponsor clients, the adviser either has to be an RIA or partner with a bank, insurance company, trust company or RIA.