Editor’s Note: This post by Todd Kading and Neal Weaver of LeafHouse Financial was submitted in response to our June 26, 2019, Case of the Week column by John Carl, “What’s a ‘Flexible’ ERISA 3(38)?” LeafHouse, which describes itself as “the FlexFiduciary™”, is a discretionary investment services firm in Austin TX that provides ERISA 3(38) fiduciary services to retirement plan sponsors, advisors, TPAs, recordkeepers and asset managers.
The offer of flexibility in designing a lineup for an ERISA retirement plan is nothing new and should not be feared. Each retirement plan is unique. Advisors and plan sponsors should embrace the concept of their 3(38) investment manager being able to utilize appropriate input and technology to design a lineup that considers the demographics of the participants, along with the investment understanding of the plan advisor or plan sponsor. Here are five main points that help explain.
1. Being inflexible is not a desired outcome. What happens when one 3(38) that is inflexible replaces another 3(38) on the same plan? Typically, all the investments in the plan will be replaced, because they are not on the preferred list of the new 3(38). It is likely some of the previous investments were in the best interest of the participants. Inflexibility can lead to a 3(38) replacing already suitable investments without considering all the factors. A flexible fiduciary finds it prudent to get input from the people who know the plan participants best. They will vet current investments and new options, welcoming input from both plan sponsor and the plan advisor.
2. Having a set lineup regardless of each different plan’s demographics, location, participant age or other factors disregards the premise that contracting with a 3(38) is in the best interest of the participants in the first place.
3. The removal of liability from the plan sponsor is an ancillary benefit and should not be the sole reason for hiring a 3(38). Despite the complexities within ERISA, at LeafHouse, we believe that the ultimate goal of our entire industry is to provide participants a dignified retirement. A flexible fiduciary is a big part of achieving this. Every plan demographic tends to be different, and those nuances should be taken into account.
4. Being a flexible 3(38) improves the offering. The 3(38) offloads the responsibility of selecting investments, making trades and monitoring funds on an ongoing basis. Ample documentation and transparency of the investment process ensures proper oversight that the 3(38) does not deviate from its core responsibilities outside the best interest of the participants. This includes the IPS, the monitoring/scoring system and other supplemental investment committee documentation. Additionally, the investments must pass rigorous quantitative and qualitative due diligence to be available for use. Through close communication with the advisor and plan sponsor, the flexible fiduciary determines what investments are appropriate for that particular plan.
5. A flexible fiduciary can always become inflexible, but an inflexible one cannot become flexible. If the advisor or sponsor fear liability from giving the 3(38) input, then simply do not provide input. Instead, ask for a standard lineup. A fun experiment would be to ask the inflexible fiduciary to actually take into account the overall issues of the individual plan. They cannot.
Todd Kading, CFP®, CPFA™, RF™, is the President of Leafhouse Financial. Neal Weaver, RF™, CFP®, CPFA, MBA, is the firm's CEO. The opinions expressed above are those of LeafHouse and are subject to change without notice. This material is not financial advice. LeafHouse reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. LeafHouse is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about LeafHouse’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.