Advisor Insights

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

W. Scott Simon

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.