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:
- Maintaining broad and cost-effective diversification (i.e. don’t put all your eggs in one basket and costs matter)
- 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)
- 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.