Employers offering a defined contribution (DC) plan like a 401k or 403b plan outsource most of the services to run the plan to third parties because they lack the knowledge and experience to be a prudent expert as required by law. Most organizations are especially not savvy about selecting and monitoring investments which has given rise to a complete delegation of these duties under section 3(38).
In an article about 3(38) providers, the author reviews the pros and cons of this outsourced service.
First, let’s review the options available to DC plan sponsors regarding investment selection and monitoring. The choices include:
- Make decisions themselves without an advisor or use a non-fiduciary broker
- Hire an advisor to recommend investments under section 3(21)
- Delegate selection and monitoring under section 3(38)
Most plans have an advisor these days who help with investments but brokers, unable to act as a fiduciary either under 3(21) or 3(38), are technically not allowed to provide advise making sure only that the investments are suitable. The new DOL conflict of interest rule changing the definition of fiduciary will require more brokers to act as a co-fiduciary or work under an exemption contract.
So assuming you want a fiduciary advisor to help with investments, the decision is whether to hire a 3(38) advisor, which will cost more, or a 3(21) professional. Some experts argue, why not just accept the recommendations of a 3(21) advisor and pay less? The answer is that under 3(38), the fiduciary responsibility and liability is also delegated adding another layer of protection to plan sponsors or a kind of insurance policy. The plan sponsor still has the responsibility to make sure that the 3(38) advisor is qualified and is prudently fulfilling their duties, but not for the decisions made.
The cost of an advisor, whether they act as a fiduciary or not, in most DC plans are paid by participants so plan sponsors must also determine whether the additional cost of a 3(38) is in the best interest of participants as well as whether it’s good for the employer.
