Why You NEED a 3(38) Fiduciary

In last month’s article, I highlighted the fiduciary standard that business owners are held to when offering 401k plans. Specifically, owners must ensure their plan fees are necessary and reasonable. Additionally, owners/plan trustees can be held personally liable for failures in plan administration (such as late remittance of employee deferrals) and deficiencies in investment options offered by the plan. The latter could include excessively high fee options, a poorly constructed fund lineup, or simply underperformance compared to peer funds.

Excluding the brief COVID-induced downturn in the spring of 2020, stocks have primarily been in a strong bull market since the Global Financial Crisis. Eventually that trend will end, a catalyst which could potentially cause an uptick in plan lawsuits… especially with a growing number of employees closing in on retirement. Rightly or wrongly, frustrated employees may look to “recover” losses experienced in the next bear market.

So, what should a business owner do? A key consideration should be hiring an advisor who will serve as a 3(38) fiduciary. A 3(38) Investment Manager takes full responsibility for the plan’s investment options: selecting the initial fund lineup, monitoring funds regularly, and removing/adding funds when necessary. Business owners are absolved of any liability as it pertains to the plan’s investment lineup. By hiring a 3(38) Investment Manager, an owner’s liability is limited to prudently selecting your 3(38) fiduciary and periodically benchmarking overall plan fees (as discussed last month). There are numerous large and experienced firms who can serve as 3(38) fiduciaries and do so at very reasonable costs.

The key takeaway? Make sure your 401k advisor can assist you in finding the right 3(38) Investment Manager for your company’s 401k plan, so you can maintain focus on your business – where it should be!

Conor R. Kelly, ChFC


The ETF Store, Inc.

“This communication is for informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product. Please contact an investment advisor before making any investment decisions.”