Practice Management

Two Hits From 1974 Still Getting Play

By Tom Foster

The most popular song on Billboard’s “Hot Singles of 1974” was Barbara Streisand’s “The Way We Were,” from the hit movie with the same title. While the popularity of the song may have diminished since then, two other hits from 1974 continue to get play and remain relevant in today’s retirement plans marketplace.

Two sections of the Employee Retirement Income Security Act (ERISA) of 1974 – 3(38) and 3(21) – continue to offer sponsors of 401(k)s and other retirement savings plans fiduciary investment protection. As retirement plan sponsors look for help in managing their fiduciary obligations, fiduciary protection services based on these ERISA codes are getting extended play by offering more choices and more customization.

Financial advisors can help demonstrate their value by reviewing available support services with sponsors and helping them make the right choice. At least one provider – MassMutual – offers an analysis tool to help advisors and sponsors assess their fiduciary needs and relative risk.

There are two fundamental levels of fiduciary protection services available – 3(38) or 3(21) – with increasing levels of customization being introduced to the market.

For sponsors that want the highest level of protection, a 3(38) fiduciary protection service may be appropriate. A quality 3(38) fiduciary protection service should automatically update fund choices, including at the sponsor level, to ensure compliance. That means sponsors can shift the burden of monitoring investment choices for compliance to a third party  The plan is responsible for monitoring the 3(38) advisor.

Naturally, a higher level of fiduciary protection also comes with more restrictions. Most 3(38) fiduciary protection services require sponsors to select their investment options from a specific, limited list of approved funds. Some sponsors find that arrangement reassuring. However, others want more investment flexibility so some service offering now provide for an expanded lists of available funds, giving sponsors more latitude to customize investment choices for their plan. Advisors need to closely evaluate both the quality as well as the range of available choices when making a recommendation.

There is another camp of sponsors who want even greater discretion over fund selection. In these instances, it may be appropriate to consider a 3(21) fiduciary protection service whereby sponsors share their fiduciary investment responsibility with the 3(21) advisor and retain the ultimate decision-making authority.  Sponsors retain responsible for making ongoing investment line-up changes in order to maintain the core asset class requirements . Clearly, this is another opportunity for advisors to show off their chops by becoming more heavily involved in making investment recommendations.

When opting for a 3(21) fiduciary protection service, sponsors are typically required to choose at least one investment option from each of four core asset classes (cash equivalent, domestic bond, domestic equity and foreign equity) from a pre-selected list

Before recommending a service to your clients, find out if a fiduciary services firm will review a sponsor’s existing investment lineup for inclusion on an approved list. Some sponsors may want to retain specific funds already on their retirement plan menu. The fiduciary support firm should review the fund lineup to ensure sponsors have the best investments for the plan with an eye towards reducing disruptions for participants.

Few recordings from the 1970s resonate with today’s audiences other than those who listen to “oldies” radio stations. But the principles of ERISA sections 3(38) and 3(21) continue to be relevant and, with the latest enhancements, should continue to climb the charts in the retirement plan market.


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E. Thomas Foster Jr. is Assistant Vice President, Strategy and Relationships, for MassMutual, a division of Massachusetts Mutual Life Insurance Co.

This article is for informational purposes only and should not be construed as legal, investment, and/or tax advice. Please consult your own legal counsel and other experts regarding the specific application of the information set forth herein to your own plan and/or circumstances.