ERISA 3(38) fiduciaries stand in stark contrast to their 3(21) counterparts. A 3(38) fiduciary does not provide the plan with a recommended menu of funds; it actually selects and manages the lineup of funds that are used in the plan.  With a 3(38) service arrangement, the 3(38) fiduciary becomes the investment manager of the plan. Neither the plan sponsor nor the plan's financial advisor retains any fiduciary responsibilities relating to the fund lineup, giving them both relief from any related liability.

ERISA 3(38) arrangements do allow plan sponsors to shift their fiduciary responsibilities to a third party. You will hear many folks say, "You can never fully relieve yourself of all investment liability." Technically this is true. The plan sponsor has a duty to prudently select and monitor the 3(38) fiduciary. But as long as the 3(38) investment manager is selected and monitored in a prudent manner, the plan sponsor cannot be held liable for the actions taken by the investment manager.  

How can plan sponsors prudently select a 3(38) fiduciary? A few questions to ask are:

• Is the 3(38) fiduciary adequately insured?
• What has the 3(38) fiduciary done to ensure that its investment process conforms to that of an "expert"?
• Has it engaged an independent fiduciary organization to review its investment process and certify that its process reflects best practices? If not, why not?
• What are the composition/credentials of its investment team?
• Does the 3(38) fiduciary have any other contracts/arrangements with the platform provider? If the answer is yes, are there any potential conflicts of interest?

And what about the requirement to prudently monitor a 3(38) fiduciary? How is a plan sponsor supposed to do that? The bottom line is that plan sponsors and other internal fiduciaries are typically business people, not investment professionals. They have to be able to rely on "experts" for assistance. Plan sponsors simply need to monitor a 3(38) fiduciary as they would any other service provider, focusing on its overall performance and the extent to which its promised services are being delivered for a reasonable fee. If the plan sponsor is supposed to receive fiduciary reports, were they provided? If the 3(38) fiduciary is charged with creating an Investment Policy Statement ("IPS") for the plan, was an IPS created? Are participants complaining about fund performance, or the fact that a fund that has been lagging its peers for a considerable time has not been replaced?  To monitor a 3(38) fiduciary prudently, a plan sponsor should be sure to ask the right questions and it does not need to be an investment expert to do so.

Having said that, should the financial advisor to a plan help the plan sponsor monitor its 3(38) fiduciary? I would argue yes – who sits in a better place than the plan advisor to assume a "quarterback" role with the plan and help the plan sponsor navigate the complex fiduciary requirements of ERISA? No one. Providing this type of monitoring assistance can be one of the key services provided by a plan's advisor.

If you speak to ERISA attorneys or attend the legal sessions at retirement plan conferences, it becomes overwhelmingly apparent that plan sponsors seeking to mitigate the fiduciary risk associated with plan investments should engage a 3(38) fiduciary, not a 3(21) fiduciary. So do 3(21) service arrangements even have a place in the retirement plan landscape today? The answer is yes. However I do think that the relevance of 3(21) services is fairly confined.

• If you have a large-sized or institutional plan, a 3(21) fiduciary can provide a practical and effective solution for the plan's investment needs. Most of these plans have well-represented investment committees whose members have investment backgrounds and want to be involved in the ongoing management of the plan's investments. A 3(21) fiduciary may be a great fit under these circumstances. But how many business owners sponsoring smaller plans share this level of experience or interest in investments? Very few. Most want to focus on running their businesses. They are not investment professionals, and do not want to be. And you can guarantee they do not want any liability associated with managing the investments. They may not even know they have it!

• If you are a financial advisor concentrating on retirement plans (and do not offer wealth management, insurance or any other ancillary investment services), serving as a 3(21) fiduciary may also be an appropriate service model for you and your plan clients. But many advisors do not focus solely on retirement plan business. The simple truth is that for most advisors, 401(k) plans are segues that may lead to other high revenue service opportunities.  For this reason, many advisors do not want to become subject to the restrictions that apply to 3(21) fiduciaries, and which limit an advisor's ability to provide rollover advice and other financial services to the plan sponsor and plan participants. Why not offer a solution that provides the plan sponsor with the protection they seek and enhances your options?  

When it comes to considering the services of a 3(38) fiduciary, there is a clear and definite value proposition for the plan sponsor and plan participants, which may be summarized as follows:

Plan Sponsor – for the small fee of adding an ERISA 3(38) fiduciary to the plan, the plan sponsor can truly mitigate the fiduciary risk associated with the plan's investments. The plan's advisor can also be elevated to playing the role of plan quarterback. As the trusted advisor, you can assist the plan sponsor in complying with the fiduciary requirements of ERISA. You can also help the plan sponsor monitor all of the plan's covered service providers (custodian, recordkeeper, 3(38) fiduciary, TPA) to ensure they are doing the job they were engaged to do, at a reasonable price. You can also participate in enrollment and education meetings and provide "risk tolerance" or "gap analysis" services to participants. You can do the vast majority of what you do today.  But as a non-fiduciary advisor, you can also offer wealth management services without being subject to the restrictions that apply to ERISA fiduciaries. Do some executives have wealth management needs? You can assist them. Are insurance services needed? You can assist with that as well. As a non-fiduciary advisor (assuming that you do not act like a fiduciary), the conflict-of-interest rules that handcuff 3(21) fiduciaries do not exist.

Plan Participants –There is a shifting landscape for retirement plans today, with an increased understanding and awareness of the average participant's ability, or inability, to retire. As the plan's non-fiduciary advisor, you can help. Not only can you provide the services mentioned above, you can also provide rollover advice to participants without being subject to the restrictions that apply to ERISA fiduciaries. How much value is there for both the plan sponsor and their participants to have an advisor who can help them provide for retirement? Financial planning at earlier stages in life can directly affect an individual's ability to retire. Get ahead of the game and show your value as an advisor who not only serves the plan sponsor but the plan participants as well.

The values of ERISA 3(38) services are undeniable. On the other hand, many plan sponsors may be overestimating the fiduciary protection available under a 3(21) service arrangement. A good ERISA 3(38) solution can serve as both a sales tool and a plan retention tool for advisors. If you manage retirement plans today and you do not have an ERISA 3(38) solution in place, have this discussion with your plan sponsor. Let them know the service exists. The one thing I can promise you is that there is someone else already talking to them about this.