Skip navigation
labor department Copyright Alex Wong, Getty Images

Post-DOL: Time to Consider 3(21) and 3(38) Services?

As the lawyers work their way through the Department of Labor’s ruling that mandates a fiduciary level of care for advisors to retirement accounts, one emerging trend among consultants, plan sponsors and broker/dealers is an interest in ERISA 3(21) and 3(38) fiduciary investment services. If you or your defined contribution plan sponsor clients are looking to modify your liability exposure, these services could be worth considering.

How They Work

With a 3(21) service, an outsourced firm provides plan record keepers a list of approved funds from a diverse set. The sponsors who use that record keeper make the final selection of funds that will appear in their company’s plan so both the sponsor and the provider share investment fiduciary responsibility. In a 3(38) arrangement, the outsourced service provider acts as a discretionary investment manager and chooses the plan’s funds. Consequently, the service provider takes on the full fiduciary risk.

The Market

At the large-plan end of the market, firms like Willis Towers Watson provide both 3(21) and 3(38) services. Because these firms provide their own consulting services, there is less opportunity for advisors to add value in the relationship.

But other fiduciary service firms work with smaller plans that are more likely to use an advisor as their plan consultant. Leah Emkin, managing director with the funds management division of Wilshire Associates in Santa Monica, California, says the firm has been offering 3(21) and 3(38) services for about six years. Today the firm works with five record keepers and oversees about $38 billion of assets in 9,000 plans.

“Almost all the plans that we work with are advisor-sold,” Emkin says. “We have plans that are complete startups that have sub-$100,000 and, then we have plans that have $100 million-plus. I would say that the average plan size, though, is between $1 million and $5 million.”

Chicago-based Morningstar Inc. is another major vendor in this market. Jim Licato, senior product manager, fiduciary services, says that the company has provided both services for about 10 years. As of year-end 2016, Morningstar advised on approximately $29 billion in 12,000 plans at 12 plan providers and record keepers. The service typically works well in the small-to-midmarket range, says Licato. He estimates that the average plan size is about $2.5 million and it’s a straightforward arrangement. “We enter into the agreement with the plan provider,” he explains. “They determine what service they want to offer to their plan sponsors, whether it’s 3(21) or 3(38) or both.”

A Shifting Market?

Emkin reports that 90-plus percent of Wilshire Associates’ fiduciary service assets are in 3(21) arrangements. She believes that dominance results from advisors’ and sponsors’ wish for more flexibility and a desire to stay involved in the fund selection decisions. The 3(21) service accounts for the bulk of Morningstar’s assets, as well, says Licato. He notes that in many plans the advisor-consultant works closely with the plan’s investment committee on fund selection; the 3(21) service allows the plan sponsor and consultant to maintain an active role in the fund selection process.

Both sources report that interest is growing in their 3(38) services due to sponsors seeking to reduce their investment fiduciary exposure. It’s an “inherently appealing option,” says Emkin, who says her division is receiving more calls than ever about 3(38) services, although those inquiries have not yet translated to a shift of business yet. She also suspects that b/ds will begin to require that their affiliated advisors use 3(21) or 3(38) providers as part of their post-DOL ruling liability-control efforts.

Implications for Consultants

Consultants working with small- and midsized plans frequently assist the plan committee on activities like drafting investment policy statements and selecting and monitoring a plan’s investment options. But what happens if a plan enters into a 3(38) arrangement that duplicates some of the consultant’s services and assumes full discretionary control over the fund lineup? Depending on the mix of services the consultant provided, that move essentially results in part of their value-added proposition being outsourced, which in turn could affect the fees they earn.

If a sponsor does go with a 3(38) service, it might make sense for consultants to consider other areas where they can add value. That could include providing qualified education to employees or meeting with participants, something the 3(38) provider generally doesn’t do, provided the activities don’t run afoul of fiduciary status. “They (plan reps) have value in giving advice and doing education meetings and they can do all that without the DOL rules, says Robyn Credico, defined contribution consulting leader for Willis Towers Watson in Arlington, Virginia. “They can also most probably help with the employer designing the plan or talking about how best to optimize the plan or make the plan consistent with trends. That’s not a fiduciary impact.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.