How a 3(38) fiduciary can help employers meet retirement plan needs

Michael Sharp

By Michael Sharp
Marketing consultant for product marketing strategy at MassMutual.
Posted on Sep 1, 2021

If you’re a small-business owner, you know that — in addition to a competitive salary — a comprehensive benefits package that includes a quality retirement plan can be key to helping you attract and retain a talented workforce.

But as an employer and retirement plan sponsor, you’re also aware that when offering and administering a plan, your company has many responsibilities. Among them are listening to the needs of employees and selecting appropriate service providers, determining optimal plan design provisions, selecting and monitoring appropriate investment options, keeping abreast of legislative changes, and educating and informing plan participants.

While these fiduciary-level responsibilities are required of plan sponsors under the Employee Retirement Income Security Act of 1974 (ERISA), these obligations can be time-consuming and complicated, and they can potentially leave you open to fiduciary liability. Furthermore, administering a plan can take up valuable time that you could otherwise be spending running your business.

A 3(21) or 3(38) fiduciary can help

To help them fulfill their fiduciary responsibilities while reducing their liability from claims related to plan investment selection decisions, or claims of inadequate plan monitoring, many plan sponsors choose to hire an ERISA 3(21) or 3(38) fiduciary investment advisor to assist with, or fully assume, these important obligations.

Typically, in a 3(21) relationship, the plan sponsor is seeking guidance and advice from a partner investment adviser as it pertains to fulfilling their fiduciary responsibilities, as well as in the choice of investment options to be offered in the plan. At the end of the day, however, in a 3(21) relationship, the ultimate decisions on investment options remains with the plan sponsor.

The role and responsibilities of a 3(38)

In contrast to the 3(21) fiduciary, in a 3(38) relationship, the plan sponsor chooses an investment manager and grants that manager full discretion over the investment options to be offered in the plan. This relieves the plan sponsor of the responsibility of selecting investment options for the plan himself or herself, as well as the fiduciary liability with respect these decisions. Limited fiduciary liability would remain with the plan sponsor, however, with respect to the selection and monitoring of the 3(38) manager.

When choosing the investment options for a plan, a 3(38) fiduciary has a responsibility to ensure that plan participants have access to a carefully vetted menu of investment selections that includes a variety of asset classes and investment styles. Given that individual plan participants will have unique savings goals, time horizons, and risk tolerances, the menu of investment options should be constructed such that participants have the opportunity to build a diversified portfolio designed to meet their personal needs.

Once the investment menu is assembled, the 3(38) investment manager then has an ongoing responsibility to consistently monitor the investment options in the plan, and to make replacements as needed.

Choosing a 3(38)

If, after weighing your options, you’ve come to the conclusion that the assistance of a 3(38) fiduciary may be beneficial to you and your company retirement plan, take the time to research various 3(38) investment manager options.

As mentioned previously, while engaging the services of a 3(38) fiduciary can relieve you of fiduciary liability as it relates to the investment options in the plan, you still retain limited fiduciary liability for the selection and oversight of the 3(38) manager. As such, you’ll want to ensure that the manager you select has the knowledge, experience, skills, and depth of resources needed to understand your plan objectives and design, and to be able to help your plan participants save for the future with the help of a diversified set of quality investment solutions.

To learn more about the services and benefits of a 3(38) fiduciary retirement plan relationship, contact your MassMutual financial professional. With the help of a fiduciary, you’ll have the opportunity to get back to building your business while helping your employees build a more secure and comfortable retirement.

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MML Investors Services, LLC, Member SPIC, 1295 State Street, Springfield, MA, is a registered investment adviser and a MassMutual subsidiary. Investment advisory services are offered through investment adviser representatives of MML Investors Services.

For information about MML Investors Services, contact your investment adviser representative to request Parts 2A and 2B of Form ADV.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.