Cover | Published in January 2013

Delegation of Duty

Sponsors must have a prudent process in place when selecting and monitoring a 3(21) or 3(38) fiduciary

By Judy Ward | January 2013
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Jon Han

“Some guy is walking into a plan sponsor’s office and saying, ‘There is this new thing called a 3(38) fiduciary’—even though it is 40 years old—‘and all you’ve got to do is sign this piece of paper and you don’t have any responsibility,’” says Gregory Kasten, CEO of Lexington, Kentucky-based Unified Trust Company. “The notion that plan sponsors can just sign a piece of paper and absolve themselves of fiduciary risk is not based on fact, anywhere.”

The idea of working with a 3(38) fiduciary adviser recently has caught on among defined contribution (DC) plans, although it has been around since the Employee Retirement Income Security Act (ERISA) came into law in 1974 and companies such as Unified Trust have done 3(38) work for decades. “Somehow, it has morphed into [the idea that this] is the way to delegate all your fiduciary responsibility,” Kasten says. For sponsors under that impression, it actually can make their fiduciary situation worse, he says, since they mistakenly think they have handed off all that responsibility. At the same time, “it can be useful in the DC world,” he says, “as long as the plan sponsor goes through a prudent process in selecting and monitoring a 3(38) and understands what responsibility is being handed off.”

Sponsors must go beyond the hype in outsourcing any of the fiduciary responsibilities for a plan, whether hiring a 3(21) or a 3(38) manager. “The problem with anybody seeking out a 3(21) or 3(38) role is that those are just numbers,” says Ary Rosenbaum, managing attorney at The Rosenbaum Law Firm P.C. in Garden City, New York. “Just because someone is advertising a number does not mean he is actually offering that service. A plan sponsor needs to see what that adviser is really offering and if that is consistent with what the plan and its participants need.”

A fiduciary under ERISA Section 3(21) is one who: exercises any authority or control over the management of the plan or the management of its assets; renders investment advice for a fee; has any discretionary responsibility in the administration of the plan; or is named in the plan documents. Although 3(21) fiduciaries provide advice, they do not take control of plan assets, so the plan sponsor or plan committee retains the final say in how the assets are handled.

A Section 3(38) fiduciary, however, is an “investment manager” that has discretion, authority and control of the plan’s assets. Under ERISA, a plan sponsor can delegate the job of selecting, monitoring and replacing plan investments to the 3(38) manager, but the plan sponsor retains liability for the selection, monitoring and benchmarking of the 3(38) manager (see “How ERISA Defines a 3(21) vs. a 3(38) Fiduciary,” on page 26).