PLANADVISER - January/February 2021 - 26

regulatory & compliance | investments
responsibility had its roots in smaller plans and worked its
way up. " At smaller companies, the people administering
the plan wear multiple hats, and an outsourced investment
model made the plan more effective, " observes Brennan. " But
with the growing complexity and importance of DC plans,
larger plan sponsors also are finding the benefit of focusing
on strategy and allowing the experts to implement the investments. "
In its 2020 survey of DC plan sponsors-predominantly
on the large end-Willis Towers Watson found that
15% of plans had adopted 3(38) structures, up from 6% in 2017.
The Ultimate Beneficiaries
Participants see benefits from 3(38) services, as well. One
may be lower fees on plan investments. Kading says Leafhouse's
reviews of plan menus, besides finding underperforming
funds, often turn up inefficiencies. " We might not
change the fund, but we would change the share class.
" With our scale, we also have the ability to realize lower
fees at the fund level, " he adds. " We may change a fund
from an R6 share class to a collective investment trust [CIT]
where we've negotiated a lower fee. "
Ultimately, participants can experience greater peace
of mind, knowing that an expert is making the decisions
regarding the investments and no committee member has
undue influence, Gratton says. " To make up a hypothetical
case, a committee member might have a passion for a fund
investing in gold or a niche sector that's not suitable. They
should always be acting in the best interest of participants,
but selecting prudent investments is what advisers do all day,
which should reassure participants. "
A Question of Value
Many advisers perform investment selection and monitoring
within the firm. Others see greater value in hiring
an arm's-length adviser.
" I can't understand why an adviser who specializes in
retirement plans would go to a third party, " says Sampson.
" There are already too many cooks in the kitchen in
servicing 401(k) plans-third-party administrators [TPAs],
the adviser, the recordkeeper, and within each there are
multiple individuals who touch a plan.
" Keeping our investment selection in-house makes us
more efficient, " he argues. Doing so lets the firm scale down
to one lineup per recordkeeper. " The reality is that many of
the third-party 3(38) services provide advisers with a list of
funds, and the adviser still has to pick from that list. There's
value to add by keeping the process internal. "
A change in perception is taking place, says Kading. Where
many advisers were taught that " their biggest value added was
in picking funds, ... over the years they've started to realize
there are many other factors more important to participants'
outcomes: education, plan design and [providing] consulting
to the employer on its plan and business. "
Adviser firm size can govern the choice. " If a sponsor is
looking to hire a firm such as ours to act as a 3(38) adviser,
it would be keenly interested in our research capabilities
and experience in selecting managers, " says Ryan Gardner,
managing partner at DiMeo Schneider & Associates, in
Windsor, Connecticut. " We have dozens of people involved
in asset-class research, and there is an advisory committee
whose job it is to help our consultants develop the best
menus in that 3(38) capacity. "
Many candidates for third-party 3(38) services are
advisers whose practice is predominantly in wealth management,
plus having a few retirement plan clients. " Unless
advisers really specialize in the DC space, they should be
leery of taking on the fiduciary liability of a do-it-yourself
3(38) arrangement and consider a third-party service, "
recommends Annin. He points to the investments in DC
plans that can be foreign to wealth management, such as
target-date funds (TDFs) and stable value accounts.
Annin also notes that third-party services provide
ongoing monitoring for funds and share classes, as well as
for changes in the broader marketplace. " Are you moving
your clients into less expensive and more efficient products
over time? That's what the outsourced 3(38) adviser service
is supposed to be doing. "
Another setting for third-party 3(38) services is among
advisers practicing within broker/dealers (B/Ds), whose
firms do not wish to take on the fiduciary risk internally.
" That helps the adviser provide the service but not serve as
the fiduciary, " says Palmer. He contends that by reducing
the allocation of in-house resources, third-party providers
enable more rapid growth of advisers' franchises.
Direct to Participants
Besides providing 3(38) services to plan sponsors, advisers
also work at the participant level, primarily through managed
accounts. According to Willis Towers Watson's 2020 plan
sponsor survey, over half of plans offer managed accounts,
across the size range-although Vanguard research,
reporting similar availability, found that participant uptake
across its recordkeeping universe is in only single digits.
With managed accounts, 3(38) services are an essential
element and are rendered to the participant directly. Both
Wilshire Associates and Leafhouse have a 3(38) hand in these
services for several recordkeeping platforms.
Complexity Calls for Risk Management
Consultants and providers expect a growing market for 3(38)
services: Complexity of the markets and regulations moves
only in one direction, expanding the need for expert services.
" Increasingly, we see annuities in DC plans, and they can be
especially challenging in the due diligence process, " Annin
says. Another source of growth is the looming availability of
pooled employer plans (PEPs), which will require the same
investment diligence as any other DC plan, and with which
smaller employers will likely need help.
" Managing a plan can mean many things, and we think
the sponsor has the opportunity to reimagine what its role is, "
says Brennan. " Does it want to be running a plan, or choosing
the investments? How much sole responsibility does it want
to take on? Or does it want to partner with experts to help
determine and implement the plan's needs? " -John Keefe
26 | planadviser.com January-February 2021
http://www.planadviser.com
PLANADVISER - January/February 2021

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