Evaluating and Selecting a 3(38) Investment Manager for DC Plan

Delegating investment discretion to an ERISA (3)(38) investment manager has become a practical governance strategy for many defined contribution (DC) plan sponsors seeking to reduce day-to-day committee workload while strengthening fiduciary process. However, moving to a 3(38) arrangement does not eliminate the sponsor’s responsibilities it reshapes them around prudent selection, clear contractual delegation, and ongoing oversight. This paper summarizes why sponsors are adopting 3(38) services, common hurdles to making the change, and a structured set of criteria to use when evaluating and monitoring a 3(38) provider.

Many defined contribution plan sponsors are increasingly outsourcing investment management to 3(38) managers to reduce fiduciary liability and administrative burden, with nearly half of sponsors now using these services. Key factors in selecting a 3(38) provider include experience, cost, reputation, and a documented investment evaluation process, while sponsors must still retain responsibility for monitoring the provider. Satisfaction rates are high among sponsors who have made the switch, with most reporting improved investment performance and a significant decrease in administrative workload.

The primary motivations for hiring a 3(38) manager are to reduce fiduciary liability and administrative burden, ensure ERISA compliance, and improve investment performance. In practice, about one-third of sponsors report less administrative work after making the switch.

Sponsors that opt not to hire a 3(38) manager often cite a desire to retain some investment control, the fact that they already use a 3(21) adviser, and concerns about additional costs. At the same time, interest in 3(38) services continues to rise (especially among newer sponsors and those in the technology sector), and many firms have shifted from primarily offering 3(21) advice to primarily offering 3(38) discretionary management. The cost difference between 3(38) and 3(21) services has also diminished, and 3(38) managers often rely on analytics and the investment policy statement to help reduce emotional bias and streamline decision-making.  

There are several challenges in switching to a 3(38) investment manager. Switching to a 3(38) investment manager can feel like a loss of investment control for many plan sponsors, because the sponsor is delegating full discretion over investment selection and changes to the manager. This hesitation is often reinforced when a sponsor already has an established relationship with a 3(21) investment adviser and is reluctant to disrupt a familiar advisory model.

Cost can also be a barrier, whether due to the perception of higher fees or the reality of incremental expenses, even though fee differences between 3(38) and 3(21) services have diminished in recent years. In addition, sponsors may have an emotional attachment to certain funds or investment options, which can make it harder to accept changes driven by analytics and policy-based decision rules rather than sponsor preference.

Additional challenges sponsors often encounter extend beyond cost and comfort with investment control. These challenges tend to arise during contracting, implementation, and ongoing oversight, and they can create operational and governance risk if they are not planned for in advance.

Scope and Role Clarity

Contracts and service descriptions can be unclear about what is (and is not) delegated, such as whether the 3(38) manager has discretion over the full lineup, only a model list, or only certain asset classes. Without precise documentation, these ambiguities can create gaps in accountability when decisions are challenged.

Operational Transition Risk

Mapping funds, coordinating recordkeeper change requests, and timing investment menu changes can add complexity to implementation. If the transition is not carefully managed, participants may experience disruption or temporary trading restrictions.

QDIA And Participant Communication Sensitivities

Changes to target date funds or managed accounts often require more careful documentation and participant messaging. Mapping decisions can be particularly sensitive where they affect defaulted participants in the plans qualified default investment alternative.

Data and Transparency Limitations

Some providers deliver high-level summaries but limited underlying data, which can make it difficult for committees to evidence prudent monitoring. Sponsors may need to confirm access to decision rationales, watchlist history, manager changes, and the fee impact of lineup adjustments.

Provider Personnel or Platform Changes

Turnover among key decision-makers, shifts in research process, or changes in sub-advisers can alter outcomes even when the contract remains unchanged. Sponsors can reduce surprise by defining reporting expectations and triggers for review when material changes occur.

Conflicts and Product Constraints

If the 3(38) manager has affiliated funds, model portfolios, or revenue-sharing arrangements, additional diligence may be needed to confirm decisions remain cost-effective and aligned with the plans investment policy statement. Sponsors may also want clarity on any platform constraints that limit the universe of available options.

Multi-Vendor Coordination

Successful delegation often depends on coordination among the 3(38) manager, recordkeeper, custodian, ERISA counsel, and any separate 3(21) adviser. Unclear handoffs can slow decisions or create process breakdowns, so roles and communication pathways should be established early.

Even after appointing a 3(38) manager, sponsors retain fiduciary responsibility for prudently selecting and monitoring that provider, which requires ongoing diligence and documentation. To do this effectively, sponsors also need sufficient transparency to understand the manager’s investment process, analytics, and the rationale behind fund selections or changes. Plan sponsors should confirm that the 3(38) provider has adequate organizational resources and liability coverage to support and defend the sponsor if litigation arises.

The following are key items to consider when evaluating a fiduciary service provider:

Experience and Track Record

When assessing experience and track record, confirm whether the provider has a proven history of managing defined contribution plans specifically in a 3(38) capacity, and ask for references or case studies that demonstrate outcomes and decision-making quality.

Cost and Fee Structure

For cost and fees, evaluate whether the provider’s pricing is transparent and competitive relative to both 3(38) and 3(21) services, and verify that the fee schedule clearly identifies any additional charges so there are no surprises after implementation.

Reputation in the Industry

To evaluate reputation, ask how the provider is regarded by clients, peers, and industry experts, and look for indicators of ethical practices and reliability through references, third-party feedback, and any available track record details.

Investment Evaluation Process

For the investment evaluation process, confirm that the provider uses a documented and repeatable approach to evaluating and selecting investments, and request a clear explanation of the analytics and scoring methods they use so you can understand and defend decisions over time.

Communication and Transparency

Assess communication and transparency by determining whether the provider can clearly explain their investment decisions and processes and whether they deliver regular reports and updates that are understandable and useful for committee oversight.

Fiduciary and Legal Strength

For fiduciary and legal strength, confirm that the provider has sufficient resources and liability coverage to support clients in the event of litigation, and ensure the contract and service agreement clearly define responsibilities and sponsor protections.

Organizational Fit 

For organizational fit, determine whether the provider’s approach aligns with your plan’s goals and your organization’s values, and whether they are flexible enough to accommodate any specific requirements or preferences you may have.

Satisfaction and Results 

To gauge satisfaction and results, ask what current clients report about their experience with the provider and whether they have seen improvements in investment performance and reductions in administrative burden after implementation.

Ongoing Monitoring

Finally, clarify how ongoing monitoring will work by asking what tools, reporting, and processes the provider offers to help sponsors oversee performance and compliance on an ongoing basis.

Conclusion

A well-chosen 3(38) investment manager can help a DC plan improve governance discipline, streamline investment decision-making, and potentially reduce the administrative burden associated with maintaining a prudent investment lineup. Even so, sponsors remain accountable for the fiduciary work of selecting the provider, confirming the scope of delegated discretion, and monitoring performance, fees, and process over time. By prioritizing experience, transparent pricing, a documented and repeatable investment process, strong fiduciary/legal resources, and clear reporting, sponsors can more confidently demonstrate prudence and alignment with the plan’s investment policy statement.

Bridgebay Financial, Inc. advises employer retirement plans including 401(k), 403(b), 457, profit-sharing, and defined contribution plans—on investment policy statements, committee charters, asset allocation, investment style selection, fund selection, ongoing monitoring, and provider evaluation. The firm’s advice is delivered through consultations with Retirement Committees and does not involve discretionary account management services.  Bridgebay creates Investment Policy Statements that provide a disciplined framework for plan governance, due diligence, and compliance with ERISA, DOL, and other regulations.  These policies set plan objectives, authorities, responsibilities, and controls, and are reviewed annually to help fiduciaries fulfill their responsibilities.  

Bridgebay conducts asset allocation and gap analyses to ensure fund lineups are diversified, efficient, and meet 404(c) requirements, identifying gaps or redundancies in fund offerings.  The firm evaluates fund menus for cost-effectiveness, asset class representation, and alignment with participant demographics and preferences, including socially responsible investments.  Advanced quantitative tools are used to assess target date and target risk funds, comparing them to benchmarks and peers to help sponsors understand performance.  Fee analysis is a core service, with Bridgebay ensuring fee transparency, benchmarking expenses, and assisting sponsors in renegotiating or recapturing fees for improved plan value.  

Ongoing monitoring are emphasized, with quarterly reviews and user-friendly reports provided to Retirement Committees. Bridgebay’s proprietary scoring system, proactive meetings, and vigilant oversight support prudent governance and help plan sponsors make informed decisions.