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Advisor Insights

What's Wrong With Third Party 3(38) Investment Managers?

In the retirement plan marketplace, the inmates are running the asylum when nonfiduciaries control the activities of fiduciaries, such as in the 3(38) outsourcing milieu.

Sometimes when the sponsor of a retirement plan such as a 401(k) plan issues a request for proposal, it may include a requirement for proposers to provide the services of an investment manager pursuant to section 3(38) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). A 3(38) investment manager accepts delegation from a plan sponsor to select, manage, and, if necessary, replace all (or some) of the investment options on a plan menu.

A proposer that responds to such an RFP can either provide the requested 3(38) services directly itself or it can indirectly provide such services by outsourcing them to a Big Third Party 3(38). In either case, ERISA section 3(38) mandates that the investment manager be (1) a registered investment advisor (that is, an "adviser" under the Investment Advisers Act of 1940, as amended), (2) a bank, or (3) an insurance company. A 3(38) must also acknowledge in writing that it's a fiduciary with respect to the retirement plan in question.

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