Why Hire A “3(38)” Adviser For A Public Agency 457(b) Or 401(a) Plan?

Most public sector retirement plan sponsors understand that even though their plans may not be subject to the fiduciary duties and responsibilities of ERISA, they are still subject to fiduciary duties under applicable State law.  Moreover, certain States like California have deliberately imported important ERISA concepts and standards into their State laws governing the behavior of public sector retirement administrators and fiduciaries. These duties, among other things, require plan fiduciaries to make sure that all fees and expenses paid from plan assets (that is, participants’ accounts) are necessary, appropriate and reasonable. See, e.g., Cal. Const., article XVI, section 17 and Cal. Govt. Code section 53213.5.

In California, many public agencies’ retirement plan committees are unaware that unless they fulfill certain ERISA-like requirements with respect to their participant-directed 457(b) and 401(a) plans, they can be held personally liable for investment losses suffered by plan participants. For more on this, see overview of section 404(c) for California public sector plans.

So, given the fact that public sector retirement plan fiduciaries can be held liable for excessive fees charged to their plan or investment losses due to the inclusion of inappropriate plan investment choices, what can they do to protect themselves? More importantly, what can they do to improve the overall investment process within their plan?

One way is to hire a “3(38)” adviser to take a number of critical fiduciary responsibilities off the shoulders of the retirement plan committee – or whomever else is liable as the plan fiduciary. See Does Your Plan Have A Proper Fiduciary Structure?  As you might expect, a 3(38) adviser refers to the provision of ERISA that allows plan fiduciaries to delegate specified fiduciary duties to certain investment service providers, such as registered investment advisers (RIAs) and trust companies. Basically, hiring a qualified RIA to serve as a 3(38) adviser to a public sector 457 or 401(a) plan is a bit like hiring a licensed pilot to bring your cruise ship into dock – that is, hiring a real professional to make sure your plan investment offerings are prudent and reasonably priced.  Typically, the 3(38) adviser makes the investment decisions, but in accordance with written guidelines established by the plan fiduciaries.

Hiring a 3(38) adviser is a good idea because most retirement committees simply do not have the time, the focus or the expertise to properly select and monitor all of the funds in their investment menu.  If your retirement committee meets for hours with your adviser to go over dozens of pages of mutual fund reports and analytics – only to have the committee ultimately “approve” the adviser’s watch/remove/add recommendations – you are a good candidate for a 3(38) arrangement where the adviser makes the decisions.

Editor’s Note: We did the best we could to make sure the information and advice in this article were current as of the date of posting to the website. Because the laws and the government’s rules are changing all the time, you should check with us if you are unsure whether this material is still current. Of course, none of our articles are meant to serve as specific legal advice to you. If you would like that, please call us at (916) 357-5660 or e-mail us at jcc@seethebenefits.com.

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