Is it surprising or scary that too many 401k advisors are still unfamiliar with ERISA terms like 3(38), 3(21) and 3(16)?
Probably both.
It’s a reason a session dedicated to the topic drew so much interest at That 401(k) Conference at Coors Field in Denver Friday morning.
Hosted by ERISA attorney Ary Rosenbaum and presented by Lyle Himebaugh of Granite Group Advisors, it explained the key differences between a 3(21) and 3(38) advisor.
More specifically:
3(21) Co-Fiduciary – “Help me”
- Shared fiduciary liability between the client and advisor for the plan investments.
- The 3(21) recommends the selection and replacement of plan investment options, but the plan sponsor must approve changes.
- A 3(21) is for plan sponsors that are comfortable assuming investment fiduciary liability.
3(38) Investment Fiduciary – “Do it for me”
- Majority of investment responsibilities are lifted from the plan sponsor and assumed by the 3(38) advisor.
- The 3(38) advisor is responsible for the investment selection, monitoring and replacement of plan options, and the plan sponsor is informed before any changes are made.
- A 3(38) advisor is for plan sponsors that don’t have the time or want to be responsible for the plan’s investments.
Referring to a 2017 survey from Charles Schwab, Himebaugh noted that 52% of participants indicated they don’t have the time, interest or knowledge to manage their 401k portfolio. Additionally, 56% indicated they either aren’t aware or don’t review plan-related education material.
For this reason, he recommended using one fund manager in each of the major asset classes, as well as the creation of model options that make investing simple and easy for employees.
While involving a 3(38) ERISA manager means the sponsor and advisor can outsource their fiduciary responsibility, there’s a catch, according to Rosenbaum, and resides in the wording of “…if an investment manager is properly appointed.”
Plan sponsors still must approve the 3(38)-investment manager, and properly document the due diligence involved in doing so, something that too many plan sponsors fail to realize and another reason the hiring of an ERISA attorney is recommended.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
