We’ve seen a lot of chatter online around the complex yet rewarding landscape of 3(38) investment management services. In the world of social media where information availability is endless, we want to ensure you have a trusted source when it comes to learning about finances, and how to best approach your retirement savings and investment strategies.
That’s why we decided to bring in the big guns, and have our very own Spencer Seggebruch, Artesys’ Chief Investment Officer, walk us through everything you need to know about 3(38) investment management.
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Let’s break it down, piece by piece! Keep reading…
What is a 3(38) investment manager?
The term “3(38)” refers to section 3(38) of ERISA, which outlines the fiduciary responsibilities and liability associated with the selection and monitoring of investment options within a retirement plan. In simple terms, a 3(38) fiduciary is an investment manager or advisor who assumes the responsibility and liability for choosing, managing, and monitoring the investment options available within a retirement plan.
When a retirement plan sponsor (typically the employer and/or HR Manager) designates a 3(38) investment manager, they transfer the responsibility for selecting and managing the plan’s investment options to the 3(38) fiduciary. This means that the 3(38) fiduciary takes on the duty to prudently select and monitor the investment options, relieving the plan sponsor of those responsibilities.
It’s worth mentioning that the specifics of fiduciary responsibilities and designations may vary depending on the jurisdiction and local regulations. Therefore, it’s advisable to consult with a legal or financial professional familiar with the relevant laws in your area for accurate and up-to-date information.
What are the things to consider when hiring a 3(38) investment manager?
When hiring a 3(38) investment manager for a retirement plan, there are several important factors to consider:
- Fiduciary Responsibility: Ensure that the investment manager understands their fiduciary responsibilities and has a track record of acting in the best interests of plan participants. Request information on how they fulfill their fiduciary duties, including their investment selection process, monitoring procedures, and documentation of decisions.
- Investment Philosophy and Strategy: Understand the investment manager’s philosophy and approach to managing retirement plan assets. Assess whether their strategy aligns with the goals and risk tolerance of the plan and its participants, such as diversification, asset allocation, risk management, and long-term performance.
- Investment Performance: Review the investment manager’s historical performance record across various market conditions. While past performance is not indicative of future results, it can provide insights into the manager’s ability to generate consistent returns and manage risk. Compare their performance against relevant benchmarks and peer groups.
- Fees and Transparency: Evaluate the investment manager’s fee structure and ensure that it is reasonable and competitive within the industry. Transparent communication about fees and any potential conflicts of interest is crucial. Remember that you can always request a breakdown of all costs associated with their services, including management fees, transaction costs, and any additional expenses.
- Compliance and Regulatory Oversight: Verify that the investment manager is properly registered with the appropriate regulatory bodies, such as the Securities and Exchange Commission (SEC) or state regulatory agencies, while checking for any disciplinary history or regulatory actions against the firm or its key personnel.
- Service and Support: Assess the investment manager’s level of client service and support, how they communicate with plan sponsors, provide regular updates on investment performance and market conditions, and handle participant inquiries.
- References and Reviews: Request references from other retirement plan sponsors or clients who have worked with the investment manager to gather insights into their experience, level of satisfaction, and any potential concerns.
- Ongoing Monitoring and Reporting: Inquire about the investment manager’s procedures for ongoing monitoring of the plan’s investments. They should provide regular reports and updates on performance, changes in investment strategy, and any material events impacting the plan.
Should an employer hire a 3(38) investment manager?
Deciding whether to hire a 3(38) investment manager for a retirement plan is an important consideration for an employer. While there isn’t a one-size-fits-all answer, there are several factors to consider when making this decision.
When employers sponsor a retirement plan, they have fiduciary duties under ERISA. Hiring a 3(38) investment manager transfers some investment-related fiduciary responsibilities to the manager, reducing the employer’s potential liability. It also reduces the risk of poor investment decisions or inadequate monitoring, as the manager assumes responsibility for these tasks, providing additional protection to both the plan sponsor and plan participants. However, it’s important to note that the plan sponsor still retains certain fiduciary duties, such as selecting and monitoring the 3(38) fiduciary itself.
Managing retirement plan investments can be time-consuming. Depending on the size and complexity of the plan, the decision to hire a 3(38) investment manager may be the right move. It’s important to evaluate the potential benefits of their expertise and fiduciary protection against the associated costs, and see if the value they provide outweighs the fees incurred. But if the employer has knowledgeable staff and the necessary resources to effectively handle investment selection and monitoring, hiring a 3(38) investment manager may be less critical.
What are the risks of not hiring a 3(38) investment manager?
Not hiring a 3(38) investment manager for a retirement plan can entail certain risks and potential consequences. When an employer sponsors a retirement plan, they have fiduciary duties under ERISA. If they choose not to hire a 3(38) investment manager, the responsibility for selecting and monitoring investment options falls on the employer, increasing their fiduciary liability as they will be held accountable for any poor investment decisions or inadequate monitoring practices. Failing to fulfill their fiduciary responsibilities regarding investment selection and monitoring can result in breaches of fiduciary duty, leading to legal disputes, regulatory penalties, and potential lawsuits.
A 3(38) investment manager can help identify and capitalize on investment opportunities, adapt to changing market conditions, and employ sophisticated investment strategies. Without their expertise, employers may miss out on potential investment opportunities that could benefit plan participants. This could result in plan participants perceiving that their investment options are poorly selected or not adequately monitored, eroding their confidence in the plan and the employer. Dissatisfied participants may become more likely to voice complaints or seek alternative retirement savings options, which can impact employee morale and retention. Without professional investment guidance, there is a higher risk of inadequate diversification and suboptimal risk management within the plan’s investment options.
How do plan sponsors hire Artesys as a 3(38) manager?
What a great question!
Employers can initiate the process by contacting Artesys through our website, phone, or email.
Typically, we will arrange a consultation to discuss the needs of the plan and how our services might be beneficial. Employers should be prepared to provide detailed information about their retirement plan for us to evaluate.
If both parties agree to proceed, they will sign a contract outlining the terms of the engagement.
Once hired, Artesys will begin the process of reviewing the plan’s current investment options and developing a strategy that aligns with the goals of the plan.
As the headlines continue to highlight the potential ramifications of poor investment decisions, we hope you’ll consider Artesys when hiring a 3(38) investment manager for your retirement plan.