Offering a 3(38) Investment Manager Fiduciary Service – It’s All About Process

A 3(38) investment manager has an incredibly important responsibility when it comes to qualified retirement plans. They are charged with creating the investment policy statement (IPS) for the plan, choosing the appropriate fund lineup based on the IPS, monitoring and reporting the performance of their investment selections, and ultimately mitigating the legal exposure of the plan sponsor in regards to the investment process.

For plan advisors who are already working as fiduciaries for their private wealth clients, this may seem like a service that easily compliments what they are currently providing. As an investment advisor representative, you fall under the Investment Advisors Act of 1940 which charges you to act in the best interest of your clients (i.e. fiduciary standard of care). But qualified retirement plans are a completely different animal when it comes to compliance. While the Department of Labor and the U.S. Treasury have laid out the rules and regulations for plan compliance, there is often a lot of “gray area” or “wiggle room” to determine whether or not a fiduciary is lawfully fulfilling their duty. This is where having a great process for fiduciary oversight comes into play in all aspects of the plan.

For example, I happen to be a believer that you are more likely to have a better investment experience by following some basic investment tenants:

  1. Maintaining broad and cost-effective diversification (i.e. don’t put all your eggs in one basket and costs matter)
  2. Having a risk exposure that is in alignment with your risk tolerance (i.e. how much pain do you need to go through to reach our long-term financial goals)
  3. Allow the market to work for you versus working against the market (i.e. the market collectively knows the most than any single investor).

The only problem is that the DOL and U.S. Treasury do not care about what I “believe in” even if it is so eloquently stated in my ADV. They are interested in seeing a process that has led me to these conclusions I have made about a successful investment experience
and why that is in the best interest of the plan’s participants and their beneficiaries. In other words, “show me, don’t tell me.”

Those who have decided to pursue this type of “process,” have typically landed on some sort of fiduciary monitoring report. You start with the entire investment universe of funds and ETFs, screen each of them against a set list of fiduciary mandates such as
fees, experience of staff, performance over multiple time horizons, and assets under management. You assign a score to each fund within their assigned Morningstar asset class, and then choose the funds with best overall fiduciary score for each major asset
class chosen in the plan’s IPS. This can also include a target-date retirement fund series as well as professionally managed, risk-based model portfolios. Industry leaders such as fi360 have built an excellent screening tool that plan advisors can use to help build
their 3(38) process.

This monitoring report is a more objective way to stating why a particular lineup, based on both qualitative and quantitative factors, serves the best interest of plan participants. Most 3(38) providers update and distribute the report on a quarterly basis, giving
insights into funds that have possibly been put on a “watch list” or completely replaced. This report can assist the plan sponsor in making sure they are ultimately fulfilling their fiduciary duty of monitoring all aspects of the plan.

The Long Term Perspective – Is 2018 Out of the Ordinary for the Stock Market

Well……no! But let’s dive a little deeper and flush this out a bit.

2018 is turning out to be not such a good year for global stock markets and investors. As of the writing of this article, global markets are down close to -13% in aggregate. The S&P 500 is looking to mark its first possible down year since the Great Recession of 2008.

While investors may be starting to get nervous and think that 2018 is a predictor of what is yet to come, it is important to take a deep breath, turn off the noise, and apply a long-term perspective to what just happened.

2018 is not something for the history books. In fact, we have experienced something similar or worse 10 other times over the last 90 years, which comes out to about 11% of the time. But while the news would like you to think the world is coming to an end to boost their own ratings, this isn’t something that we can consider an “anomaly” or what statistical geeks like myself like to call a “tail event.” Would you be surprised if I told you that since 1928 we have experienced a similar market move to the upside 14 times (i.e. a globally diversified equity portfolio returned more than 34% in a calendar year)? More importantly, we would expect a market movement like what we have experienced about 7% of the time or once every 14 years just by random chance alone. Aside from the Great Recession of 2009, we haven’t seen global markets down this much in aggregate since 1990 when Vanilla Ice’s “Ice Ice Baby” was topping the U.S. music charts. In other words, we are about due for a 2018 type of year.

Statistics can tell us a lot about “odds” or how frequently we can expect a random series of events to occur. Fortunately for us as investors, we have a wealth of data about stock markets across numerous market events such as economic depressions, expansion, world wars, hyperinflation, the falling of entire sovereignties, housing crises, etc. In short, capital markets have been battle-tested and through it all there has been one common theme: markets will be volatile, but the odds are in your favor as long as you don’t do a couple of key things. One of these is to lose your nerve during a down market. This alone probably has the single biggest impact on your long term financial success.

Key takeaway for investors are the following:

  1. 2018 isn’t indicative of anything. In fact, it is an important reminder that you are taking risk by investing in stocks and you must go through some pain in order to enjoy the long term gain they provide over the long term. The key is to figure out how much pain in order to achieve your long term financial goals.
  2. Your personal financial plan should have already considered experiencing a year like 2018. An excellent financial advisor would have run simulations that consider years such as 2018 and its overall impact on your financial plan.
  3. Now is a great time to rebalance your portfolio (i.e. sell bonds and buy stocks). Am I out of my mind? Nope. I am sticking to my long-term plan.
  4. Tune out the noise. It will do nothing to inform you. All it will do is raise your stress level and possibly force you to succumb to those bad investing habits we and our financial advisors have tried hard to do away with.

Keep the long-term perspective my friends.

Advising Retirement Plan Opportunities

Getting started in any line of work is tough. Formalizing your ideas, creating an action plan, finding prospects, and delivering on your value proposition takes time, care, and a whole lot of hard work.

Becoming a retirement plan advisor is no different. Fortunately, the life source to your future business may already be hiding in clear sight…your current relationships!

Finding Solutions…Not Pushing Product!

The most valuable aspect of working with an advisor such as yourself is your unbiased, independent, solutions-oriented approach. It is looking out for your clients’ best interest versus your own. We must first diagnose the problem before we write the prescription.

Diagnosing the problem or identifying the goal starts with asking the right questions.

For example, do you find yourself speaking to a small-business owner who wants to grow their business by attracting the right talent in a tax efficient way?

Then you may have a candidate for a 401(k) plan with profit sharing.

Or maybe you have a physician or lawyer who is currently maxing out their 401(k) and profit sharing plan, and is recognizing a considerable amount in taxable income every year.

Then you may have a candidate for a cash balance plan.

Or maybe you even have a client who is an executive at her company, cannot put away as much money as she wants to because of low participation in her company’s retirement plan, and is frustrated by having to receive corrective distributions every year.

Then you might possibly have a candidate for a non-qualified deferred compensation plan.

All of these scenarios present different solutions based on each client’s situation. We aren’t in the business of shoving a 401(k) down everyone’s throat, but we are in the business of finding solutions based on objectives. Diagnosis BEFORE prescription.

How can you get started?

3 Starting Points for Growing Your Retirement Plan Assets:

1. Current Clientele:

  • How many clients do you work with who are small business owners?
  • How many clients do you have that currently have a SIMPLE Plan?
  • How many clients do you have that are executives that their company?

Since you are the quarterback to your clients’ financial lives, all three of these questions are easy to answer and provide great candidates to begin a conversation about a retirement plan.

Whether it is to start a brand new plan, convert a SIMPLE Plan, or takeover an existing plan, don’t worry, RPC has your back. We can assist in requesting the right documents, doing an in-depth plan design, providing a cost comparison, and helping you push the deal over the finish line.

2. Existing Plans In Your Area:

  • If you were to guess how many existing retirement plans where currently in a 5 mile radius of your office, what do you think that number is; 100, 200, 500?
  • How many people do you interact with on a daily basis that probably participate in a retirement plan?

These are questions RPC can easily answer for you. We can run prospect lists within any mile radius of any zip code in the United States. Our queries can be specific to a certain asset size, participant count, or even industry for those advisors who have a specialized niche.

Of course we don’t expect you to start cold calling the entire list, but there may be a name on the list of someone you know. Maybe you attend the same church, consistently play a round of 18-holes with, is a lifelong friend, or have a client that works for a particular company that sponsors a 401(k) plan. These are all important people in our lives and they probably value your opinion over a stranger’s….even if it is just a second opinion.

3. Niche Clientele:
Over time, your practice may have naturally gravitated towards clients in certain industries. Maybe you work with a lot of lawyers, physicians, teachers, manufacturers, or non-profits. While many industries face different financial needs, most professionals within the same industry probably face the same financial challenges. As a resource who understands their industry, you can help address the needs of these professionals from a holistic perspective and recommend solutions to help address some of their retirement related obstacles.

RPC is more than happy to assist in anyway we can. We can help provide objective and unbiased information that can be considered professional recommendations and not sales pitches. We can also assist in providing presentation materials on pertinent topics that addresses concerns of your niche clientele.

Getting started in the retirement plan business is no easier than getting started in any other industry. Fortunately for you, the blood, sweat, and tears you have already put into growing your clientele can be a great life source for growing your retirement plan services as well.


It can be difficult to know when a newly hired employee is eligible to participate in your company’s retirement plan, but it is very important as it can help you avoid administrative hassles and mistakes that will need to be corrected at the end of your plan year. That is why we have a couple simple steps to help you determine not only when your employee is eligible, but when they may actually enter the plan.

  1. Open up your Adoption Agreement: This document can be found in your Fiduciary Audit File Binder and is also available 24/7 on your plan sponsor website under Forms/Documents/Reports, the Forms sub tab.
  2. Go to Section B: 11a. This section will tell you how long an employee must work for your company before being eligible to withhold money from their paycheck and defer it into the retirement plan.
    1. Your plan will either note a number of hours needed to be completed, or an amount of time to be completed.
  3. Go to Section B: 11b. This section will tell you whether your plan utilizes “Hours of Service” or “Elapsed Time”.
    1. Hours of Service means that once the employee has worked the hours necessary to participate, they are eligible to defer money into their retirement plan.
    2. Elapsed Time means that service is measured strictly by the time that has passed. If the employee has completed 12 months of service, the employee is credited with a year of service, regardless of the number of hours worked.

Now that you have determined whether your employee is eligible to defer (Have they worked the necessary hours? Have they been with the company the appropriate length of time?), you are ready to determine when they are able to enter the plan.

  1. Go to Section B: 13a. This section will tell you whether your employee can enter the plan immediately when they become eligible, or if they must wait until the first day of the calendar month, plan quarter, semi-annual dates, or plan year.

Record Retention – The “Paper” Trail

As plan sponsors are well aware, the pension law (ERISA) includes specific reporting and disclosure obligations with respect to qualified retirement plans. A lesser known fact is that ERISA also has specific requirements regarding the retention of plan records. Below we answer questions you and other plan sponsors may have about retaining records and the importance of a record retention policy.

Why would we need a record retention policy? A retirement plan, by its very nature, generates a large amount of documentation. Some records should be retained indefinitely. Others may be disposed of in time. Having an established document retention system that allows plan records to be reviewed, updated, and preserved or disposed of in an organized fashion fosters good administration and helps the plan comply with pension law. Such a system can also make required documents readily accessible for IRS review, if requested.

Who is responsible for retaining plan records? Under ERISA, the plan administrator — which is often the plan sponsor — is ultimately responsible for maintaining the plan’s records.

What records do we need to keep? The list is long. First, you need to keep all records that support the information included in your plan’s Form 5500 filings and other reports and disclosures. These supporting documents essentially include whatever records a government auditor might need to verify the accuracy of the original report or disclosure. You also need to keep records used to determine eligibility for plan participation and any plan benefits to which employees and beneficiaries may be entitled. Records include:

  • The original signed and dated plan document, plus all original signed and dated plan amendments
  • Employee communications including Summary Plan Descriptions, Summaries of Material Modifications, and anything else describing the plan that you provide to plan participants
  • The determination, advisory, or opinion letter for the plan
  • All financial reports
  • Copies of Form 5500
  • Payroll records used to determine eligibility and contributions, including details supporting any exclusions from participation
  • Evidence of the plan’s fidelity bond
  • Documentation supporting the trust’s ownership of the plan’s assets
  • Documents relating to plan loans, withdrawals, and distributions
  • Nondiscrimination and coverage test results
  • Employee personal information, such as name, Social Security number, date of birth, and marital/family status
  • Employment history, including hire, termination, and rehire dates (as applicable) and termination details
  • Officer and ownership history and familial relationships
  • Election forms for deferral amount, investment direction, beneficiary designation, and distribution request
  • Transactional history of contributions and distributions

How long do we need to keep the records? Generally, you should keep records used for IRS and DOL filings for at least six years after the filing date. Retain records relevant to the determination of benefit entitlement indefinitely (basically, permanently).

Reviewing Loan Options

Participants can watch this demonstration to learn what their loan options are, acquire some helpful tips before requesting a loan, and then guide them through the process to request that loan.

Answering Your Fidelity Bonding Requirements Questions

As a retirement plan sponsor, you should be aware that every person who handles the property or funds of the plan must be bonded. A field assistance bulletin (FAB) issued by the U.S. Department of Labor provides guidance on fidelity bonding requirements. Understanding these requirements fully will help protect your plan and your business.

The bulletin includes the following information about applying the fidelity bonding requirements.

What is the purpose of a fidelity bond? The purpose of a fidelity bond is to protect your organization’s retirement plan from risk or loss due to acts of fraud or dishonesty by individuals handling the plan’s assets. These acts include theft, embezzlement, and forgery.

Who must be bonded? Generally, plan fiduciaries and any other person who handles plan funds or other property (a “plan official”) must be bonded. For example, officers and employees of the plan or plan sponsor who handle the receipt, safekeeping, and disbursement of plan funds are subject to bonding. Service providers and fiduciaries don’t need to be bonded if they don’t handle plan funds or property. Several specific exemptions also are included in the pension law.

What is meant by “handling” plan funds? Generally, “handling” plan funds refers to activities that pose a risk that the funds or property could be lost in the event of fraud or dishonesty, such as:

  • Physical contact with cash or checks
  • Power to transfer funds or property from the plan to oneself or a third party
  • Authority to direct disbursement
  • Authority to sign checks or other negotiable instruments
  • Supervisory or decision-making responsibility over activities that require bonding

How much coverage must the bond provide? Each plan official must be bonded in an amount equal to at least 10% of the amount of funds he or she handled in the previous year, with a minimum bond requirement of $1,000. Generally, the maximum bond amount that can be required for any one plan official is $500,000 per plan. However, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.

Is a fidelity bond the same as fiduciary liability insurance? A fidelity bond is not the same as fiduciary liability insurance. Fiduciary liability insurance is additional coverage that generally protects the plan against claims for losses sustained because of a plan fiduciary’s breach of duty.

Can any bonding or insurance company issue an ERISA fidelity bond? No, fidelity bonds must be placed with a surety or reinsurer that is named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570 (

Are any plans exempt from the bonding requirements? Plans that are completely unfunded or not subject to Title I of ERISA are exempt from the bonding requirements. An unfunded plan is one that pays benefits only from the general assets of the organization.

Can a bond insure more than one plan? If your organization sponsors more than one retirement plan, you can purchase one bond to cover all of your plans. However, the bond’s amount must be sufficient to allow for a recovery by each plan in an amount at least equal to the amount that would have been required for each plan under separate bonds.

Can the bond have a deductible? No. The bond must provide coverage from the first dollar of loss up to the maximum amount required.

If the amount of funds handled by the plan increases after the bond is purchased, must the bond be updated during the plan year?No. The bond amount must be fixed annually (or estimated at the beginning of the plan’s year pending receipt of necessary information) for each covered person based on the highest amount of funds handled by that person in the preceding plan year. So the bonding amount can change from year to year, but not during the year. If the plan doesn’t have a complete preceding reporting year, the amounts covered must be estimated.