Ary Rosenbaum, Attorney
The proliferation of 3(38) investment managers is positive, but there are 2 minor points of concern.
One of the most positive developments in the retirement plan business is the ERISA §3(38) fiduciary. The idea that a plan sponsor can shift almost all of their liability in the fiduciary process to an ERISA defined investment manager is attractive in a litigious happy environment. Sort of like having the folks at Fairway Market cook my Thanksgiving dinner, it allows the plan sponsor to delegate almost all of the headaches of being a fiduciary to the experts.
While I support the work of ERISA §3(38) fiduciaries, I have two concerns. They are two minor concerns that should not overshadow the good work of ERISA §3(38) fiduciaries.
First, I can’t put a sign on my front lawn that I am a lawyer unless I have been admitted to the state bar. The same can be said of advertising being a registered investment advisor (RIA) without the proper licensing and registration. However, I can claim to be an ERISA attorney without any experience and an RIA can claim to be an ERISA §3(38) fiduciary without any experience. While any RIA can learn to be an ERISA §3(38) fiduciary, it’s not something you can wake up one morning and can become one. So plan sponsors should be wary of people advertising themselves as an ERISA §3(38) fiduciary, because not all ERISA §3(38) fiduciaries are created equally. The proliferation of ERISA §3(38) fiduciaries will create a herd mentality where RIAs will tout their ERISA §3(38) services without understanding what that job entails.
So with the marketplace expanding with people claiming to be ERISA §3(38) fiduciaries, there will be some incompetent ERISA §3(38) fiduciaries out there who will make some mistakes that will lead to litigation and the issue is that ERISA §3(38) was drafted in 1974, years before there were ever 401(k) plans and daily valued, participant directed plans. While ERISA §3(38) fiduciaries assume the liability of being an investment manager in the contract (if drafted correctly), will courts decide that what the ERISA §3(38) fiduciaries really are who they say they are? Are their function covered under a definition that was drafted before there was a 401(k) industry> I don’t know, I’m not a litigator. I am also not stating that hiring an ERISA §3(38) fiduciaries are a mistake nor do I want to spread any innuendoes (like what happened with multiple employer plans), I just think that plan sponsors should hire competent fiduciaries and if RIAs want to be in the §3(38) game, they need to learn the rules. Learning the rules can be as simple as partnering up with a §3(38) like the my good friends at Loring Ward or my good friend, James Holland at MilleniuM Investment & Retirement Advisors or learning to become one. 2012 is a year I will dedicate to helping RIAs understand the role of ERISA §3(38) fiduciaries and how to become one.