3(16), 3(21) and 3(38) Fiduciary Services – what are they all about?

Short answer – for our clients, wasting money.  See below for more info.

3(16) services are administrative services performed by someone else on behalf of the Plan Administrator (usually the employer) – essentially, outsourcing administrative duties such as maintaining and interpreting the plan document, providing notices, etc.  We do all of this for our clients, but under the role of a “third party administrator” – i.e. we prepare everything for the client to sign, give to employees, etc. but never are the Plan Administrator (note capital P capital A).  The perception is that off-loading some of these duties to a 3(16) provider relieves the Plan Administrator of some fiduciary liability – but just choosing a 3(16) provider is a fiduciary function, so you can never totally avoid that liability.  Not that it is an option for our (small) plans, but those who are considering this might be better off just paying for some fiduciary liability insurance.

3(21) services are investment oversight services, where a co-fiduciary monitors and advises on investments offered by the plan.

3(38) services are investment oversight services, where a co-fiduciary monitors and actively changes investments offered by the plan.

3(21) and 3(38) services have definitely found their way into our little corner of the plan world, in fact, you can’t have a conversation with a recordkeeping provider without them launching into their 3(21) and/or 3(38) services.  But when you think about it…

  • choosing one of these services is in itself a fiduciary act, so you can never totally avoid that liability
  • the costs are usually small (0 to 2 basis points) but they are almost always borne by the participants, while the parties being protected are the trustees and the financial advisor
  • when I ask what, exactly, are they being protected from, no one can say (because at this point they are just buzzwords)
  • the reality is they are being protected from participant lawsuits…that may be a real threat in a $1 billion plan where a class action is worthwhile, but in a small plan with $1 million in assets (and the majority of those assets are for the owner(s)!)…who, exactly is a threat to bring a lawsuit?!
  • the idea of quarterly reviews is so ingrained in the industry that it is taken as a necessity, but it’s…stupid. Anyone who thinks that quarterly performance is any kind of indicator does not understand that it takes years –  at least 18, perhaps hundreds, to differentiate between luck and skill in the mutual fund world.  I’m not advocating throwing darts or just using index funds; that’s a whole ‘nother topic…but the idea of constant “monitoring,” while it sounds good, is just a waste.  It’s far more important to pick funds with a decent probability of success and stick with them

Finally, just to wrap it all up – these services cost money, but their actual worth in terms of reducing liability and generating higher returns is questionable at best.