A 3(38) investment manager is a codified investment fiduciary on a retirement plan as defined by ERISA section 3(38). They are responsible for selecting, managing, monitoring, implementing, and benchmarking the investment offerings of the plan. The 3(38) also has discretionary authority to direct the investment of the funds unless it is a participant-directed plan. The employer typically acts as an investment manager by default, unless another party is explicitly named.
This article will explore the role of a 3(38) investment manager in more detail, outline the responsibilities and risks associated with the role, and discuss the benefits of outsourcing this function.
What You'll Learn
Understanding the role of a 3(38) investment manager
A 3(38) investment manager is a codified investment fiduciary on a retirement plan as defined by ERISA (Employee Retirement Income Security Act of 1974) section 3(38). The 3(38) investment manager is responsible for selecting, managing, monitoring, implementing, and benchmarking the investment offerings of the plan. They have discretionary authority over the plan investments unless it is a participant-directed plan.
The employer acts as the investment manager by default unless another party is explicitly named. Many employers create investment committees to satisfy 3(38) requirements. If there is no investment committee, the trustee must fulfil the functions of this role. Outsourcing a 3(38) investment manager must be to an RIA firm, bank, or insurance company.
The duties of a 3(38) investment manager are set by the ERISA statute and are enforced by the Department of Labor. They may also have additional duties as set out in the plan document and related agreements. These duties include:
- Creating and managing an Investment Policy Statement (IPS)
- Selecting plan investment options prudently
- Reporting on investments regularly to the retirement plan's trustee
- Benchmarking the investments
- Replacing funds and updating model portfolios as needed
- Holding investment committee meetings
- Providing education to participants about the plan's investment options
There is a level of risk associated with this role. There is a history of lawsuits relating to the responsibility for the costs and performance of a 401(K) plan stemming from the fund lineup selected by the 3(38) investment manager. Outsourcing to a professional firm can mitigate this risk.
Outsourcing the role of an investment manager can reduce an employer's workload and costs. An effective investment manager will ensure that investment lineups are cost-effective, prudent, diversified, and competitive. Outsourced investment management can be obtained at a low cost, which is offset by the savings obtained on investments.
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The benefits of outsourcing to a 3(38) investment manager
Outsourcing to a 3(38) investment manager can bring a host of benefits, from reducing costs and risks to saving time and achieving better outcomes.
Reducing costs and risks
Outsourcing the role of an investment manager can dramatically reduce an employer's costs and risks associated with a 401(k) plan. A 3(38) investment manager will ensure that investment lineups are cost-effective, prudent, diversified, and competitive. The cost of outsourcing is easily offset by the savings obtained on investments. The 3(38) investment manager also assumes the bulk of the liability and fiduciary risk, although the employer is still responsible for selecting and monitoring the 3(38) investment manager.
Saving time
Outsourcing investment management can free up time for employers to focus on other aspects of the business. The 3(38) investment manager takes on the time-consuming tasks of researching, selecting, and providing ongoing maintenance for the investments in the company's retirement plan. This can be especially beneficial for smaller companies or partnerships, where time is of the essence.
Achieving better outcomes
A 3(38) investment manager can bring about faster fund changes, leading to compounding returns and better retirement results for employees. With quicker fund changes, companies no longer need to spend time scheduling and holding committee meetings, researching, and debating proposed changes. This also reduces expenses and logistics, as there are fewer meetings and lower travel costs, lost billable hours, and expert fees.
Peace of mind
One of the biggest advantages of outsourcing to a 3(38) investment manager is the peace of mind it brings to plan sponsors. The emotional relief of not having to make difficult investment decisions and the comfort of knowing that experts are handling the retirement plan are significant benefits.
Overall, outsourcing to a 3(38) investment manager can provide cost savings, risk reduction, time savings, and improved outcomes, making it a valuable option for companies of all sizes.
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The risks of being a 3(38) investment manager
There is a level of risk associated with being a 3(38) investment manager. This role comes with a high level of responsibility and accountability, especially as plans increase in size.
The 3(38) investment manager is responsible for selecting, managing, monitoring, and benchmarking the investment offerings of the plan. They have discretionary authority to direct the investment of funds unless it is a participant-directed plan. As a result, they are generally held accountable for claims involving plan investments.
There have been many lawsuits regarding the responsibility associated with the costs and performance of a 401(k) plan stemming from the fund lineup selected by the 3(38) investment manager. Outsourcing this role to a professional firm can help mitigate the employer's liability.
Additionally, the employer is still responsible for selecting and monitoring the 3(38) investment manager, so it is important to conduct thorough due diligence when choosing a candidate. This includes asking key questions such as their investment philosophy and process, their working knowledge of relevant regulations, and the associated fees and expenses.
Overall, while hiring a 3(38) investment manager can provide valuable support and expertise, it is important to carefully consider the risks and conduct thorough research to make an informed decision.
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The responsibilities of a 3(38) investment manager
A 3(38) Investment Manager is an investment fiduciary on a retirement plan as defined by ERISA (Employee Retirement Income Security Act of 1974) section 3(38). The role comes with a certain level of risk and the person fulfilling it is generally held accountable for claims involving plan investments.
The duties of a 3(38) Investment Manager are set by the ERISA statute and are enforced by the Department of Labor. They may also have additional duties as set forth in the plan document and/or any agreements in place. Here are some of the responsibilities of a 3(38) Investment Manager:
- Create and manage an Investment Policy Statement (IPS)
- Form an Investment Committee
- Hold investment committee meetings
- Prudently select plan investment options
- Report on investments regularly to the retirement plan's Trustee
- Benchmark the investments
- Replace funds and update model portfolios as needed
- Provide education to the participants as it relates to the plan's investment options
- Analyze the existing lineup, asset classes, and diversification
- Review the reasonableness of investment fees and expenses
- Provide detailed investment performance reports
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How to choose a 3(38) investment manager
A 3(38) Investment Manager is a codified investment fiduciary on a retirement plan as defined by ERISA (Employee Retirement Income Security Act of 1974) section 3(38). The 3(38) manager is responsible for selecting, managing, monitoring, implementing, and benchmarking the investment offerings of the plan.
When choosing a 3(38) investment manager, it is important to consider the following:
- Fiduciary status: Ask the manager to put their fiduciary status in writing. This is important as it outlines their responsibility and liability.
- Investment philosophy and process: Understand their approach to investing and how they make decisions. Ensure their philosophy aligns with your goals and risk tolerance.
- Qualitative and quantitative investment criteria: Assess the criteria they use to evaluate investments. This should include both qualitative factors, such as management expertise and industry trends, and quantitative factors like financial ratios and performance metrics.
- Review process: Find out how often they will review your plan's investment lineup and what this review entails. A good 3(38) investment manager will regularly monitor and adjust your investment portfolio as needed.
- Knowledge of regulations: Ensure they have a working knowledge of ERISA and other retirement plan regulations. This is crucial to ensure compliance and avoid legal issues.
- Collaboration and reporting: Understand how they will partner with you and your financial professional. Ask about the frequency and type of reports you will receive. Regular reporting ensures transparency and allows you to track the performance of your investments.
- Fees and expenses: Be aware of the associated fees and expenses. While cost is an important consideration, it should not be the sole deciding factor. Focus on the value and expertise the manager brings rather than just the price.
By asking these questions and conducting thorough due diligence, you can make an informed decision when choosing a 3(38) investment manager that best suits your needs and helps you achieve your investment goals.
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Frequently asked questions
A 3(38) Investment Manager is a codified investment fiduciary on a retirement plan, as defined by ERISA (Employee Retirement Income Security Act of 1974) section 3(38). They are responsible for selecting, managing, monitoring, and benchmarking the investment offerings of the plan.
A 3(38) arrangement outsources the burden of investment decision-making and associated risks to a qualified expert. This saves time, reduces costs, and improves outcomes for companies by streamlining the fund selection and change process. It also provides fiduciary protection as the 3(38) assumes sole fiduciary liability for investment selection and monitoring.
There is a level of risk associated with the role of a 3(38) Investment Manager due to potential lawsuits regarding the costs and performance of a plan, which may result in personal liability for fiduciaries. However, outsourcing to a professional firm can mitigate this risk.
When hiring a 3(38) Investment Manager, it is crucial to conduct due diligence. Start by consulting your plan's financial professional and consider the following questions: Will the 3(38) put their fiduciary status in writing? What is their investment philosophy and process? How often will they review the plan's lineup? Do they have working knowledge of ERISA and retirement plan regulations? What are the associated fees and expenses?