PLANADVISER - January/February 2021 - 25

you can still have a participant lawsuit. " Thus, providers have
developed a new sub-industry of 3(38) services, and 3(38)
capabilities have evolved for plans and advisers of all sizes.
The benefits to plan sponsors of engaging their adviser
on a full-discretion 3(38) basis are many and extend beyond
just fiduciary obligations. " While handing over the liability
on investment selection and monitoring is a big part of the
decision for some sponsors, for many others it's a workload
issue, " says Jeff Gratton, chief marketing officer at Sageview
Advisors in Santa Monica, California.
" For smaller employers, the only involvement they want
is to see that the contributions are transferred and notices
go out on time, " says Jim Sampson, director of Hilb Group
Retirement Services, in Cranston, Rhode Island. " They do
want to improve participant outcomes, however. "
Clients are relieved of performing due diligence on each
fund in their plan, explains Todd Kading, a co-founder and
president of Leafhouse, a 3(38) advisory firm in Austin, Texas.
" Our staff spends thousands of hours a year on [such] reports. "
Delegating the investment side lets sponsors focus on key
compliance and administrative issues-plan design, participant
communication, financial wellness- " all the things
that are just as important in helping people, " Gratton says.
And it is not just plan sponsors that can outsource
the investment monitoring function. Advisers without
the requisite DC investment skills or scale in-house can
outsource by engaging their own 3(38) adviser-third-party
firms such as Wilshire Associates, Mesirow Fiduciary Solutions,
Morningstar and Leafhouse Financial-each of which
approaches the business a bit differently.
Compensation for Adviser Risk
Whether the benefits of a 3(38) arrangement entail additional
fees to the plan depends on the adviser. The investment work
is essentially the same under a 3(21) agreement or a 3(38).
" Some would say advisers should charge extra for the additional
liability you're taking on, " Sampson says. " We generally
don't charge extra for 3(38). We use the same investment
policy statement [IPS] and the same criteria in grading funds,
and we explain it all to the committee the same way. "
What differs is the adviser's increased liability. " There
is clearly more liability for us, so there's some extra cost to
the client, " Gratton says. " That's not significant, though, and
it's rare that a sponsor would look at the extra cost of a 3(38)
as a negative-that isn't what's going to determine whether
they engage us. It's more about relinquishing control over
the investments to an outside adviser.
" Rather than a question of putting in extra hours for the
client, " he continues, " it comes down to an additional insurance
liability and being sure we are compensated for that. "
He reckons that Sageview charges an average of 15% higher
fees under 3(38) programs.
While most trends in the DC world start at the largest
plans and migrate down-market, delegating investment
planadviser.com January-February 2021 | 25
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PLANADVISER - January/February 2021

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