Many DC Plan Sponsors Are Moving to Outsource Investment Management

Reducing fiduciary liability is a top reason to hire a 3(38), and one-third of sponsors that have done so report a reduction in administrative burden.

Among the sponsors of defined contribution plans—401(k), 403(b), 457 and nonqualified deferred compensation—47.66% reported that they use a 3(38) investment manager, and more than one-third (34.04%) said they’ve considered hiring one, according to the 2025 PLANSPONSOR Outsourced Investment Manager Survey.

The primary reasons for not seeking a 3(38) are that the sponsor wants to keep some control over investments (61.29%), it already uses a 3(21) investment adviser (51.61%), and it wants to avoid the cost (29.03%).

Sean Kelly, senior vice president, financial advisor, Heffernan Financial Services, says the outsourcing of investment management among DC plans has increased. “At least it is coming up in conversations more than it has in the past,” he says.

Kelly says the question of whether an adviser offers 3(38) investment management has been on requests for proposals for years, but it wasn’t really part of a potential client’s follow-up. He says he believes it’s now being discussed because plan sponsors are getting more sophisticated and becoming more aware of, and more involved with, their fiduciary responsibilities.

Kim Cochrane, director, client services, with Hub International MidAtlantic, says it had been common for her firm to act as a 3(21) investment adviser to clients, but over the past couple of years, that has changed—now her firm almost exclusively serves as a 3(38) investment manager. Among the clients her firm has gained since 2020, all but a few have hired it as a 3(38) investment manager, and many 3(21) clients move to 3(38) services each year, she says.

Plans of all sizes are asking about 3(38) investment management services, according to Kelly, who notes that he gets asked more by newer plan sponsors and by those in the technology industry.

Cochrane says she sees the move to 3(38) investment management among plans of all types and sizes, although some large 403(b) plans might have a board of directors that wants to give some input on investment decisions. “But, definitely, plans on the smaller side want to use a 3(38),” she adds. “I’ve also found that if ERISA [Employee Retirement Income Security Act] counsel or outside auditors are involved with a plan, they are pushing plan sponsors to use a 3(38) provider.”

According to the 2025 PLANSPONSOR Outsourced Investment Manager Survey, among those that use a 3(38), the primary reasons are to reduce fiduciary liability (73.77%), to ensure compliance with ERISA (59.02%), and to improve investment performance (55.74%). Factors that count most when selecting a 3(38) provider are: “experience and track record;” “cost of services;” and “reputation in the industry.”

Kelly agrees that reducing fiduciary liability is a primary reason a DC plan sponsor would want to outsource investment management and notes that plan sponsors still carry the fiduciary responsibility of selecting and monitoring the 3(38) provider. The increased interest in having a 3(38) also “may just be a new way of doing business, so [the sponsor] can focus on [its] core competency,” he says.

“First, it is our specialty and not usually the client’s specialty,” Cochrane says. She says she has seen the outsourcing movement evolve from when plan sponsors started outsourcing administration to a 3(16) plan administration provider, then moved to outsource investment management.

Kelly says his firm used to charge more for 3(38) investment manager services than for 3(21) investment adviser services, but it doesn’t anymore, and he hears other firms have lowered those fees too. “So when thinking about outsourcing investment management, plan sponsors need to consider whether they want [to give] input into investment selection or not. That’s the key consideration between 3(21) and 3(38) services,” he says.

Hub International MidAtlantic also charges no more for 3(38) investment management than for 3(21) investment advice, Cochrane says, which she believes is one reason the service is so compelling for plan sponsors. “Why would you want that extra responsibility,” she says.

Cochrane adds that it makes the process easier for both parties as well, and it eliminates the emotion that can creep in to decisionmaking. “When we act as a 3(21) and make a recommendation to a client, in some scenarios, someone would say, ‘Oh, but I like that fund. I don’t know if I want to get rid of it,” she says. “As a 3(38), we use typical analytics and the plan’s investment policy statement to make decisions and changes without emotional ties. It was more difficult to have the client involved, and it took longer.”

She also notes that, most of the time, if her firm was acting as a 3(21) and made a recommendation, the client would go with it, so acting as a 3(38) would save some steps.

When shopping for a 3(38) investment manager, Kelly says, plan sponsors should look for providers that have a process by which to evaluate investments and that document the process. “None of my prospective clients have ever said, ‘Let me see your performance,’” he says. “It doesn’t come up.”

Cochrane agrees that the choice is not solely about performance or about fees. “Sponsors need to ask what type of analytics the investment manager uses to score investments. “With a 3(38), sponsors don’t have the liability of authorization to make investments, but they still need to understand why a manager made the fund selection or change,” she says. “Make sure the analytics is deep, and the manager is not just chasing returns.”

Additionally, Kelly suggests, plan sponsors should assess their impressions of the provider. “Do they feel comfortable and confident in the adviser’s ability? Does the adviser have the ability to communicate so everyone understands?”

Further, Cochrane says, plan sponsors should confirm the 3(38) organization is strong enough to defend the client in court. “How big are the assets used to hire attorneys if there’s litigation?” she says. “Hire a strong organization with funding and proper [liability] coverage.”

More than three-fourths (77%) of DC plan sponsors surveyed reported they are very satisfied with their 3(38) provider. One-third (33.3%) said investment performance for their plan’s investments has significantly improved since using a 3(38), while 40% said it has slightly improved and 23.33% said there’s been no change. According to 37.29% of respondents, there has been no noticeable change in the plan’s investment menu under a 3(38), though 28.81% said the number of options on the menu has slightly increased, and 16.95% said it has significantly increased.

More than one-third (36.67%) of respondents said their administrative burden has significantly decreased since using a 3(38); 40% reported it has slightly decreased; and 21.67% said there’s been no noticeable change.

Nearly three-fourths (73.77%) of respondents said they don’t anticipate making any change in their 3(38) relationship in the next one to two years.

—Rebecca Moore