PLANADVISER - January/February 2019 - 25

Advisers who act as a 3(38) investment manager do not
have to " get into the weeds " when doing investment reviews
in committee meetings, Krasnow says. " We go through the
funds on the watch list, but we spend more time and effort
on employee education and plan design and metrics. Now,
instead of always being a plan's investment adviser in those
meetings, we're more balanced as a specialized retirement
plan adviser in a consulting role, " he says.
In those meetings, Pension Advisors can speak more
about trends in a plan's key analytics such as average
contributions and participation. And it can talk with
the committee about
targeted education campaigns, for
instance one aimed at increasing participation or deferrals
up to the match. When a committee is freed up from
making investment decisions in its meetings, Krasnow says,
" it's one less thing they have to worry about, so they can
focus more on the overall health of the plan. "
Hiring an adviser for 3(38) work can increase the advisory
fee. Asked how he explains that to sponsors, Arends
says, " Do we have an upcharge for serving as a 3(38)? We
do, but it's not like it's double, " he says. " We're assuming a
higher level of risk, and we have to pay for that extra risk
in our E&O [errors and omissions insurance] to do that. I
think sponsors understand risk-I mean, they're businesspeople.
They say, 'OK, is the value there for that upcharge?' "
For sponsors especially concerned about fees, his firm has
developed an all-passive-fund lineup it can use for a core
investment menu or to create custom target-date funds or
risk-based funds.
Everhart Advisors decided, for several reasons, to charge
the same fee for its 3(38) and 3(21) services, Hanna says.
" Complete independence is one of our key differentiators,
and we want to be independent when we guide our clients
through the 3(38) vs. 3(21) decision, " he says. " We view our
liability as being the same: We are on the hook fully as a fiduciary,
either way. "
The Communications Dynamic
" It's actually more efficient for us to function as a 3(38)
adviser vs. a 3(21) adviser, " Hanna says. " Instead of having
to educate a committee through an investment
decision it has to make, we as a 3(38) adviser can simply
make that decision. It's a far more streamlined approach
for an adviser. "
Being a 3(38) investment manager, vs. a 3(21) investment
adviser, changes the communication dynamic between an
adviser and sponsor. To get the reduced fiduciary liability
that comes with having a 3(38) adviser who assumes discretion,
Hanna says, a sponsor has to stay out of investment
decisions. " The committee is giving up a significant amount
of control to obtain that limitation in liability, " he says. " If all
they're going to do is rubber-stamp our decisions, I suggest
that they might want to take advantage of the additional
protection they can get from hiring us as a 3(38). But if
they want to continue to participate in conversations about
investments being selected or removed, then hiring us as a
3(21) is the only option. "
Sometimes sponsors who have hired a 3(38) investment
manager feel surprised that the adviser really does make
all of the investment decisions, Shoemaker says. " The plan
sponsor's challenge is that, when they first hire you, they
struggle with giving up that decisionmaking authority, "
she says. " In those cases, we always tell them, 'If you start
acting like we're a 3(21) fiduciary, we're going to be viewed
[legally] as a 3(21), not a 3(38),' " she says. New clients sometimes
hire Plante Moran as a 3(21) adviser initially, because
they want the experience of going through all of the investment
details with the advisory team. " A year or two later,
they have gotten comfortable with our processes, " she says,
" and then they may move to our 3(38) service. "
No one formula works for the ongoing dynamic between a
sponsor and a 3(38) investment manager, Edwards says, but a
sponsor always has a fiduciary responsibility for monitoring
the 3(38) manager that it chose. " The only way a plan sponsor
can shed its fiduciary responsibility is to no longer be a plan
sponsor, " he says. " A plan sponsor can delegate what work it
wants to, but the sponsor has to continue to monitor what
the adviser is doing and whether it is adding value for the fee. "
The biggest challenge for a 3(38) investment manager
comes in the adviser deciding how much to communicate
with the client about investments, Krasnow says. " These
clients have kind of handed everything over to us to make
investment decisions. Yes, we're getting the keys to the
castle, but it's a balancing act on how much we keep them
[apprised], " he says. " We still want them to understand what
we did and why we did it. "
IRON Financial serves as a 3(38) fiduciary on over 3,000
plans, and each sponsor gets plan-specific reporting on
a quarterly basis, Friedman says. " We put that report in
a layman's format, " he says. " But behind that is as much
empirical data as they want to see. "
Each of IRON Financial's quarterly investment reports
includes a performance review of the plan's funds, a narrative
on what is happening with each watch-list fund, and a
" fiduciary scorecard " visual for the plan's investment menu.
The scorecard includes color-coding that communicates
each fund's status in an easy-to-understand way. If the
3(38) adviser has changed the share class of an investment,
for example, that fund's name appears in orange. If he has
made a fund change, that appears in red on the scorecard.
" At the end of the day, if you're a plan sponsor, quantitative
analysis is not your cup of tea, " Friedman says.
Intellicents provides written quarterly investment
reviews as a 3(38) and still goes out and delivers those
reviews every quarter
in meetings, Arends says.
" We
encourage the committees to oversee the process on a quarterly
basis, " he says. He stresses the importance of a 3(38)
adviser providing written, thorough due-diligence reports
on investment changes.
" You have to take detailed minutes on why and how you're
making decisions such as fund changes and share them with
your 3(38) clients, " Arends says. " You can't just print out the
Morningstar report for that fund. You have to be able to show
that you know what you're doing. " -Judy Ward
planadviser.com January-February 2019 | 23
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PLANADVISER - January/February 2019

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