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Last March, the U.S. Department of Labor (DOL) proposed a 401(k) investment selection rule that sets out a six-factor framework for judging an investment’s prudence and clears a path for alternative investments — private equity, private credit, hedge funds, crypto — long kept off 401(k) menus. I support the framework but argue that 401(k) plans are no place for alternative investments without strong consumer safeguards.
Alternative investments are expensive, illiquid, hard to value, and difficult for participants to understand. The rule addresses none of it.
Some financial services industry trade groups defend this omission as asset neutrality. I see it differently. It is too much caveat emptor for retirement plan sponsors — who have a fiduciary duty to protect plan participants from extraordinary losses. A sponsor who fails to meet this responsibility by following the advice of a conflicted 3(38) investment manager — one with a product agenda who built a prudence case that looked legitimate — could be held personally liable for restoring the resulting losses.
That said, the omission has a bright side. With no safeguards to rein them in, advisors who put personal profit ahead of participant outcomes will push the high-fee alternatives the rule puts within reach — making them stick out like a sore thumb. The same gap that leaves participants exposed makes the wrong advisor easy to spot, and a reputable one easier to hire. To make that easier still, here is what a 3(38) does — and a checklist for choosing one that does it well.
The Benefits of a 3(38) Investment Manager
A 3(38) investment manager is a fiduciary, named under ERISA section 3(38), that takes discretionary authority over a plan’s investments and accepts legal responsibility for those decisions. For a plan sponsor, this delegation can offer real relief. The 3(38) chooses and monitors the lineup, while you keep only a narrower duty to prudently select and monitor the manager. For a fee, you get professional investment selection and less personal liability if the investments result in extraordinary participant losses.
The benefit reaches participants, too. Most are not investors — they want to retire well, not study expense ratios or rebalance a portfolio. A reputable 3(38) gives them an unbiased lineup of prudent, low-cost investments — and an age-appropriate default for those who never make a choice — all chosen by a fiduciary whose only job is their retirement, not a sales target.
Checklist to Hire a Reputable 3(38)
A 3(38) only delivers on all of this if it is independent, competent, and focused on outcomes. Work through these items before you sign, and keep your answers on file.
Independence and Compensation
The manager’s pay does not change based on which investments it selects. Confirm in writing that it accepts no revenue sharing, no 12b-1 fees, and no other indirect compensation tied to the lineup — and that it is not affiliated with your recordkeeper, an insurer, or a fund company. A manager paid the same regardless of what it picks has no reason to pick the wrong thing.
A Written 3(38) Acknowledgment
The service agreement states plainly that the firm serves as your ERISA section 3(38) investment manager and accepts fiduciary liability for the investment decisions. If a provider markets “3(38) services” but will not put the acknowledgment in the contract, you are not getting the protection.
An Evidence-Based Investment Philosophy
There is nothing wrong with a philosophy that seeks to outperform the market. But a manager that pursues one must clear a single bar: match or beat a comparable index fund, net of fees, over time. The evidence shows how hard that is — the S&P SPIVA Scorecard and the Morningstar Active/Passive Barometer both find that most active strategies fall short, trailing low-cost index peers over the long run. Hold any manager to that standard, whatever its approach.
A Demanding Standard for Alternatives
Ask directly whether the manager will add alternative investments to your plan, and under what conditions. A credible answer addresses fees, liquidity, valuation, and whether a rank-and-file participant can reasonably understand the product — and is comfortable concluding that the answer is usually no.
Full Fee Transparency
You can see every dollar the manager and the underlying funds collect, stated as both a percentage and a hard number. Reasonable, fully disclosed fees are a fiduciary requirement, not a courtesy.
A Documented, Repeatable Process
The manager provides an Investment Policy Statement, follows a defined monitoring schedule, and keeps records you could produce if you are ever questioned. The process should serve the outcome, not substitute for it.
Insurance and Accountability
The firm carries fiduciary liability and errors-and-omissions coverage, will provide references, and will agree to be benchmarked. A manager confident in its value does not resist measurement.
Walk Away If You See These 3(38) Red Flags
Some signs are disqualifying. End the conversation if a manager:
- Pushes proprietary or affiliated funds.
- Gets vague or evasive when asked about conflicts of interest.
- Shows enthusiasm for adding complex or illiquid alternatives without a clear, participant-first rationale.
- Bundles its services so tightly with recordkeeping that you cannot tell who is paid for what.
Each of these signals a business model that profits from selling product or process — the very thing fewer safeguards will make easier.
Remember to Monitor Your 3(38)
Selection is the first duty; monitoring is the continuing one. Document why you chose the 3(38), review its performance and fees on a set schedule, benchmark it against other managers periodically, and keep records of each review. If the 3(38) drifts toward higher-cost or more complex products, your monitoring is what surfaces the problem while you can still act.
The Stakes Are Too High to Make a Bad Choice!
401(k) plans exist to help people invest for the future — to grow their retirement savings by owning productive assets at a reasonable cost. Many of the alternatives the rule would wave through behave more like speculation than investments: bets on hard-to-value assets, carrying high fees and a downside that can be severe and permanent. A defensible six-factor analysis can still be built around them, and nothing in the rule stops a potentially conflicted manager from building one.
The cost falls on the people least able to absorb it. A participant approaching retirement whose account is damaged by an illiquid, mispriced alternative has little time to recover, and a retirement balance does not come with a do-over. The plan fiduciaries who are duty-bound to protect that participant are exposed too — a sponsor who follows a potentially conflicted 3(38) into a speculative product is the one left answering for the losses, not the manager who built the prudence case.
That is why the choice in this checklist is not a formality. Choose a 3(38) investment manager whose compensation, philosophy, and process all point toward participant outcomes — and who is willing to say no to the products the rule will make easier to sell. With fewer guardrails in the rule, that choice is the guardrail. The stakes are too high to get it wrong.
