3(38) fiduciary (investment manager)

What a 3(38) fiduciary is

Section 3(38) of ERISA defines an “investment manager” as a fiduciary that has the power to manage, acquire or dispose of plan assets, that is a registered investment adviser, a bank or an insurance company, and that has acknowledged in writing that it is a fiduciary to the plan.

For a 401(k), a 3(38) manager typically selects the fund lineup and the default investment, monitors them and replaces funds when needed. It acts without asking the employer to approve each change.

Why it matters to employers

ERISA says that when an investment manager has been properly appointed, the plan’s other fiduciaries are not liable for the manager’s individual investment decisions. This is the largest transfer of investment responsibility available to an employer.

It is not a complete transfer. Appointing the manager is a fiduciary decision. You must choose the manager prudently, understand its fees and review its performance periodically. Keep a record of each review.

Example

An employer appoints a registered investment adviser as 3(38) manager under an investment management agreement. During the year the manager replaces an underperforming bond fund. The employer is told about the change and does not need to approve it. At its annual review, the employer checks the manager’s report against the plan’s investment policy statement and files the minutes.

Common mistakes

• Assuming a 3(38) covers plan administration. Filings, notices and distributions are 3(16) duties.

• Not having the written acknowledgment of fiduciary status.

• Never reviewing the manager after appointment.

• Assuming the manager is responsible for investments employees choose through a brokerage window. Usually it is not.