PSNC 2018: Fiduciary Services and Support

Understanding the opportunities associated with 3(21) and 3(38) fiduciary services—and the key differences between them—can help ensure the best use of the retirement plan committee’s time and resources.

The second day of the 2018 PLANSPONSOR National Conference (PSNC), in Washington, D.C., featured an in-depth panel discussion on the evolving topic of fiduciary services and risk outsourcing, in both the 3(21) and 3(38) capacities.

Speakers on the panel included Christopher Kulick, senior vice president and financial adviser with CAPTRUST, as well as Spencer Goldstein, principal and chief investment officer (CIO) with StoneStreet Equity. While both noted that the initial conversation about fiduciary outsourcing often focuses on whether the plan sponsor could offload risk—both men also agreed the more important element of the conversation is actually about assessing the potential time savings by committees that have embraced fiduciary support services.

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“When thinking about fiduciary support services and outsourcing, really the important considerations should be about process and time management, more than fiduciary risk transfer,” Kulick suggested. “When it comes to deciding whether 3(21) advisory services or 3(38) discretionary investment management services are appropriate, there are a few key questions to ask.”

These include the following: Is everyone on the retirement plan committee engaged and actively involved during recurring meetings? Is there a healthy amount of debate and deliberation going on when it comes to plan decisions? Is there at least a minimum level of investment prowess on the committee?

“Fiduciary 3(21) investment advice makes a lot of sense if your committee is engaged and you challenge and question your adviser on a regular basis,” Kulick saidd. “In that case, 3(21) plays best for those plans. If your committee is the opposite and there is rampant indecisiveness and disengagement, I would suggest seriously considering a 3(38) discretionary investment management relationship. And it also has to do with resources and time. If you have seen job/budget cuts or retirements out of your finance and HR [human resources] committees, that can be a good time to think about moving toward 3(38), as well.”

Goldstein warned repeatedly that retirement plan sponsors can never—never—offload all of their fiduciary risk under the Employee Retirement Income Security Act (ERISA). Even in a 3(38) discretionary fiduciary relationship, where the adviser takes on full control of the investment menu, the sponsor still has a real degree of fiduciary risk exposure.

“With 3(38) service, you are effectively trading a lot of small decision points with one much larger, more important decision,” Kulick said. “You have a fiduciary responsibility to be diligent and partner with the right firm—to monitor and document the relationship over time to ensure it is appropriate.”

Both speakers agreed that going with 3(38)-level service frees up much more time for the retirement plan committee to talk about items besides fund choices and investment returns. There can be a greater attention to plan design, plan performance, boosting deferrals, improving communications, etc.

“With our 3(38) clients, we spend probably just 10% of each quarterly committee meeting reviewing investments, and we can then spend 90% of the time talking about plan performance and participant outcomes,” Goldstein observed.

When it comes to choosing a 3(38) fiduciary service provider, the speakers cautioned that all of the sales pitches will sound fantastic, but the devil is in the details.

“I would absolutely have counsel involved and have them look at any contracts and make sure you’re getting what you are being promised,” Kulick said. “When it comes to costs, sponsors will see some providers charge the same across 3(21) and 3(38) services. That is attractive on its face for a lot of plan sponsors, but you need to look under the hood and make sure you know what you’re getting and what you pay for. Vet this out through the RFP [request for proposals] process.”