As fiduciaries, plan sponsors are legally obligated to prudently select and monitor all plan service providers, including the plan advisor. You can’t, however, accurately monitor a plan service provider—in this case the plan advisor—if you don’t have a clear understanding of the advisor’s role and responsibilities. Clarity matters.
The Difference Between Working with a 3(21) Fiduciary and 3(38) Investment Manager
Sponsors of small- to mid-size plans may not have investment committees or in-house investment expertise and rely on their plan advisor for investment advice. If that’s the case, then knowing the fiduciary status of your plan advisor is all that much more important. If you are only looking for investment recommendations, then working with a 3(21) fiduciary advisor may be all that you need. If you are looking to transfer your investment fiduciary responsibility, then you will need to work with a 3(38) investment manager. The key difference between the two is that a 3(38) investment manager has discretion and takes on the full responsibility for the selection and monitoring of your plan’s investments. Practically speaking, this means that with a 3(21) fiduciary advisor, you are still responsible for investment decisions. You will have to sign off on any changes to the plan investment lineup. The final decision to add or remove funds will fall squarely on your shoulders. If instead you work with a 3(38) investment manager, you do not need to make the final decision on the investment selections of your plan. That responsibility—and the potential fiduciary liability—fall squarely on the shoulders of the 3(38) investment manager.
If you are a sponsor who is considering working with, or currently works with, a 3(38) investment manager, you should know that transferring your investment fiduciary responsibilities to the latter does not absolve you completely of potential fiduciary liability. You are still responsible for the prudent selection and monitoring of your 3(38) investment manager.
Below is a list of best practices I believe sponsors should consider for both hiring and monitoring a 3(38) investment manager.
Selecting a 3(38) Investment Manager
- Initiate a process to narrow the list of potential investment manager options for your plan.
- Initiate a Request For Proposal (RFP) to solicit information and qualifications for the candidates you are considering.
- Document your decision-making criteria and selection process.
- Conduct a formal appointment process.
Monitoring a 3(38) Investment Manager
- Hold regular periodic meetings with the investment manager and review investment performance, fees, benchmarks, etc.
- Document the meetings and retain in plan file.
- Review overall satisfaction with the investment manager’s services annually.
- Consider using an RFP process periodically to compare the current investment manager to others, perhaps every three to five years.
The Employee Retirement Income Security Act (or ERISA) sets a high bar for plan fiduciaries. When done correctly, retaining professional discretionary investment manager services can free up your time and provide additional peace of mind.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
OppenheimerFunds does not recommend any specific investment options or asset allocations.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
These views represent the opinions of OppenheimerFunds’ National Sales Director, DCIO, and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.