Falling in love and getting married is a wonderful experience. When we are young and optimistic about our futures, we are often naïve about what spending the rest of our lives with another person entails. Many couples don’t realize the financial challenges they will face. But the second time you decide to tie the knot, you are wiser. And often your financial situation is more complex. You realize that money can be a source of marital conflict and a contributor to divorce. You want to avoid making the same money mistakes from your first marriage. But how do you initiate these conversations, and what topics should you address?

Jon faced this dilemma when he decided to propose to Charlene. The couple met when they were both volunteering for a church organization that builds houses for families in need. Jon, an accomplished surgeon, made over $1 million a year and recently divorced. Charlene came from a middle-class background and had never been married. Once they got engaged, she sensed that Jon’s four adult children were skeptical of their relationship. Because she didn’t want to be seen as a gold digger, Charlene avoided talking about money and encouraged Jon to leave all his assets to his children. Jon reluctantly agreed with this plan without fully realizing the impact on her long-term financial well-being.

Lucky for Jon, CAPTRUST Financial Advisor Catherine M. Seeber, CFP®, CeFT®, was his trusted advisor. She helped the couple engage in a series of premarital money conversations and develop a plan for Jon to take care of his children and his new wife upon his death. According to Seeber, “The couple decided that philanthropy was important and that they wanted their resources to go to Jon’s children to support their lives now. I helped the couple create a family foundation where the entire family could get involved and use their wealth to support the causes they all believed in.” In the end, this shared philanthropic activity strengthened the bonds between Jon, Charlene, and the next generation.

While your situation may be different than Jon and Charlene’s, the need for an open and honest dialogue about money is paramount for setting the stage for a healthy relationship. This will allow you and your partner to be clear about your expectations and help both of you communicate your plans to the next generation.

Share Your Money Mindsets

Every person has automatic thoughts and beliefs about money and wealth—called money mindsets—and these attitudes impact saving, spending, investing, and gifting behaviors. A great way to start a financial dialogue with your partner is to ask about his or her money mindset. Questions to get the conversation rolling include:

The discussion that ensues will help you uncover each other’s mindsets and understand the rationale behind your financial habits.

When discussing money mindsets, it is vital to listen more than you talk. Fight the urge to interject your ideas until your partner is done answering each question. Then, once he or she has had a chance to share, you can share yours.

The goal of this conversation is to identify similarities and differences in your perspectives. When Jon and Charlene shared their money mindsets, they identified the shared value of charitable giving and their differing attitudes toward wealth. They could then use these insights to work with their advisor to develop a financial and estate plan that honored their individual and joint mindsets.

Consider a Prenuptial Agreement

The odds of a couple splitting up are high in the U.S., with 50 percent of first marriages and 67 percent of second marriages ending in divorce. When you remarry, you don’t anticipate another breakup, but the statistics are not on your side. Therefore, signing a prenuptial agreement often makes good financial sense.

A prenuptial agreement is a document that summarizes how you will handle your finances during your marriage and in the event of a divorce. (A postnuptial agreement is a very similar document that is signed after a couple gets legally married.) If you have children from a previous marriage or have significant assets or family wealth, prenuptial agreements protect your children and your wealth should your marriage end prior to your death. They are drafted with the guidance of an attorney, often with input from a financial advisor.

Many people buy into the myth that if a couple has a prenuptial agreement, the marriage is destined to fail. The truth is that disclosing your financial history and assets to your future spouse is valuable, and the dialogues that result are worthwhile.

Robert, a business owner and divorcee, found that his relationship with his second wife benefited greatly from this experience. “We had the hard discussions. We didn’t sweep money and finances under the rug. Through the process, we educated each other about how we thought and felt about money, and I feel far better to have had the experience than not,” he says.

Review Your Estate Plan

One of the trickiest issues a couple faces when blending families is estate planning. How will each partner’s assets be transferred to the children from previous marriages? Will it be similar or different than how the wealth is transferred to any offspring from the new marriage? Will the surviving partner from the second marriage inherit the family home, or will other provisions be made to ensure his or her financial stability?

These are not easy questions, but they are important issues for couples to discuss and think through carefully. Since state and tax laws vary, it is important to consult with an estate attorney and a financial advisor to run different scenarios so you can make the best decision for your family.

CAPTRUST Financial Advisor Mike Molewski, CFP®, ChFC®, works with couples in collaboration with an estate attorney to determine the best vehicles to use to accomplish a couple’s goals. It may involve setting up a trust, retitling assets, or using insurance proceeds to pass on wealth. His recommendation is to “focus the estate planning discussion on the transfer of assets, and avoid making it personal.”

When Warren and Betsy planned to marry, they both had children from a previous marriage. Warren wanted to make sure Betsy was taken care of in the event of his death but didn’t want to rewrite his trust. The solution was to take out a life insurance policy with Betsy as the sole beneficiary. This created a future income stream for his new spouse and allowed his adult children to keep their inheritances intact.

Decide How to Manage Your Money

It is important to take time to talk with your future partner about the when, where, how, and why of your financial life together. For example, if you have children from a previous marriage, how does your new spouse feel about paying for expenses related to their care? If you own several real estate properties, will you jointly cover the property taxes, or will you pay this expense individually?

There are no right or wrong ways to manage money in your marriage—only the method that works for both of you. The key to success is being proactive and thinking through how to cover day-to-day expenses before they become a source of conflict.

When Justine married her second husband, Sean, she owned several rental properties and a primary residence. While Sean was willing to split the household expenses for the home they would share together, he was reluctant to take on the burden associated with her rental properties. After discussing the matter, the couple agreed that Justine would retain sole ownership of her rental properties and realize the income and incur the expenses associated with this real estate. They signed a prenuptial agreement that clearly spelled out this arrangement and how the assets would remain in Justine’s possession should their marriage end in a divorce.

Review Your Plan Annually

The decisions you make initially may change over time. You may be still hurting from the breakup of your first marriage or uncertain how your new blended family will gel. As CAPTRUST Financial Advisor Donn A. Johnston Jr., CFP®, said, “What is right at the beginning of the partnership isn’t necessarily right five years after the marriage.” Therefore, making a pact with your second spouse to review your initial financial and estate planning decisions annually, or at least every few years, makes sense.

Getting married again is a leap of faith that involves many decisions, especially if you and your second spouse are blending two homes into one. It is important to acknowledge the complicated family dynamics, thoughtfully discuss money matters, and realize that everyone is going through a transition. Be wise and consult with your financial advisor, estate attorney, and the members of your family. Taking action today will help you live happily ever after tomorrow.

These stories should not be construed as an endorsement, reference, or comment from any client regarding the quality of investment advisory services CAPTRUST provides.

On April 10, 2012, U.S. Army Staff Sergeant Travis Mills was leading an 82nd Airborne squad searching for weapons at an outback post near Kandahar. It was his third deployment to Afghanistan.

The area had been swept for explosives and found clear. Except it wasn’t. Mills set his pack down on an improvised explosive device that had gone undetected. In an instant, life as Mills had known it was torn apart, and life itself was not a given.

Three paratroopers were injured in the blast. In the words of platoon commander Zack Lewis, “One was minor, one was severe, and one was simply beyond words.” The latter was Mills. Medics rushed in and started applying tourniquets. Mills told them to attend to the others, because they actually had a chance of surviving.

“I thought it was a waste of their time, and it would all be over soon anyway, so it’s OK,” said Mills. “Then it kind of hit me. I might not see my daughter. I might not wake up to see my wife again.”

Medics worked to stabilize him in the field, and Mills was airlifted to a medical base where teams worked around the clock to keep him alive. Four days later, on his 25th birthday, he learned the extent of his injuries. He had lost portions of both legs and both arms. He is one of only five quadruple amputees to survive the Iraq and Afghanistan wars.

The Long Road Back

Mills doesn’t sugarcoat the months of recovery that followed, first in Germany and then at the Walter Reed National Military Medical Center in Bethesda, Maryland.

He worried about comrades left behind. He worried his infant daughter, Chloe, would see him as a monster and scream. He felt he should give his wife the house, the bank account, and the freedom to pursue a life with an able-bodied husband. “That’s not the way this works,” Kelsey Mills had replied. She remains his rock.

To Mills’ surprise, Chloe cuddled with him like he was any dad. “I have short arms, short legs, and a fuzzy chest; I guess to her I look like a teddy bear,” he quips.

After some dark days, the path ahead came down to a conscious choice. “I could either will myself to die, or I could press forward and live,” Mills said. If his wife was going to stay, and his six-month-old daughter was going to smile and giggle at him, he had to choose to move forward.

Recovery came with excruciating pain from nerves trying to find limbs that were no longer there. After failing to control the pain with ever-higher doses of painkillers, his doctors took a radical step. They put him in a ketamine-induced coma, only the second time this had ever been done in the U.S. High doses of the drug would allow the brain to reset to understand where nerves now end.

After five days in a coma came the hallucinations. Chasing kids who had stolen from Walmart. On patrol with Genghis Khan. Escaping from a SWAT team. Riding skateboards with cousins in a reality TV show. Mills admits that the 50-year-old go-go dancer he saw crawling down the halls of Walter Reed was probably a service dog.

Ultimately, the therapy helped manage the pain enough that Mills could make rehabilitation his full-time job. Determined to be independent, he made remarkable progress. He took his first steps on prostheses less than two months after his injuries.

From Hallucinations to Dreams

As his recovery progressed, the perennially upbeat Mills inspired fellow veterans at Walter Reed and earned the nickname “Mayor of Building 62,” the warrior transition building.

“I saw the doctors at Walter Reed doing such great things; Kelsey and I decided we wanted to give back,” said Mills.

In November 2013, after 19 months, Mills was ready for a new chapter as a “recalibrated warrior” ready to pay it forward. A trip to a veterans retreat in Colorado showed Mills the restorative power of adaptive sports and sparked a vision to provide a similar opportunity in their new home state of Maine, with one key difference. Mills knew Kelsey and Chloe were central to his recovery; his retreat would include whole families, not just veterans.

Thus, the nonprofit Travis Mills Foundation was born. It started with small programs—bringing one family at a time to Maine to show them how to live more fully through adaptive activities. “Then we did another one, and it went so well we thought we should buy a property,” Mills said.

In March 2015, the foundation bought the 1929 summer home of cosmetics mogul Elizabeth Arden in Rome, Maine. The former Maine Chance Lodge had fallen into disrepair. The project would require millions: $1.1 million to purchase and $2.5 million to renovate it to be fully accessible.

An outpouring of support totaling $2.5 million in cash and in-kind gifts from corporations, foundations, and individuals helped make the dream a reality.

Today the 11,000-square-foot facility on 17 acres features eight suites that can accommodate eight families a week—up to 40 people per session. There are comfortable communal areas, including a library, movie theater, dining room, and outside patios. The entire property is fully accessible for guests with amputations and spinal cord injuries.

A Blockbuster First Season

The Travis Mills Foundation Veterans Retreat opened its doors to the first eight families in June 2017. Their expenses were covered by the foundation through generous donations and sponsorships.

The first eight weeks were so successful that four more sessions were added, extending into December, ultimately serving 89 veterans and their families from 27 states. The season concluded with veterans who had also been hit by Hurricanes Harvey and Irma, including some families that had never seen snow.

Summer and fall guests have an array of choices: archery, equine therapy, paddleboarding, kayaking, pontoon boat rides, tubing, fishing, swimming, hiking, yoga, martial arts, golf, cycling, disc golf, a ropes course, massage therapy, arts and crafts, cooking classes, wine tastings, and more. Winter sessions make use of the lake in a new way, adding ice fishing, sled hockey, and snowshoeing.

One family included four children ranging from 1 to 16 years old. The father has amputations on both legs, plus nerve damage in his hands. Traveling with a family of six is tough enough without mobility challenges. During their stay, the daughters ran up to Mills and exclaimed, “This is better than Disneyland!”—high praise from teenagers.

“An action-packed but overwhelmingly laid-back atmosphere”

That’s how one veteran described the experience. Activity-based programming keeps participants busy and entertained at their own pace, and helps families return to an active lifestyle together.

“These men and women who have been through so much—amputation, paralyzation, spinal cord injuries—can still do things with their families instead of living life on the sidelines,” said Mills. “They come here, they’re comfortable, they build a network, they have someone to lean on, to reach out to, to believe in, to understand they’re like them. And the kids can run around and say, ‘You know what, my dad has one leg and one arm missing, but this dad has two legs missing, and he can still do things.’ That’s pretty cool.”

“This is a place where veterans don’t have to worry about barriers, they won’t get stared at for their disabilities, they’re around people who really know what they’re going through, and where nobody freaks out if you fall out of a kayak,” said Mills.

With the help of partners such as Maine Adaptive Sports, Pure Country Stables, and Project Healing Waters Fly Fishing, outdoor equipment has been modified to accommodate users with a range of upper and lower limb abnormalities.

For example, a special ramp and dock system eases the process of getting into a kayak, said program director Kelly McGaughey, DPT. McGaughey was a physical therapist at Walter Reed for seven years before joining the Travis Mills Foundation. “We have different straps, hooks, weights, padding, and more to ensure that everybody is comfortable, functional, and safe in the equipment.”

The Definition of Success

In reviews and thank-you notes, participants rave about the volunteers and staff, the food, the beautiful setting, and the relaxed ambience. But the most profound and pervasive theme is the way the retreat fosters connection, hope, and renewal.

“Getting to know others who are in a very similar position gives you more insight into how to handle your own challenges,” wrote former Marine Lance Corporal Kendall Bane of Huntsville, Alabama. “These connections are what get me through rough days.”

“What I got from the retreat was a sense of relaxation, camaraderie, serenity, and a loving, caring environment,” said Mark Owens of Leland, North Carolina. “There was never worry about how to navigate the grounds, and the activities were very well thought out to eliminate the stress.”

“The peace that came over me, the time with other wives and veterans is indescribable,” Cynthia Karels wrote on the foundation’s Facebook page. “We do lose faith. We do question why our loved one, why my husband? The way Travis spoke with us was just uplifting, fun, and lighthearted, with joy, a smile, and a few tricks he taught our kids that helped lift that tension.”

“I had a bad day at the office.”

Mills, 30, doesn’t spend much time looking back, and he’s not about to slow down. He intends to operate the Maine retreat 40 to 45 weeks a year to serve 1,600 to 2,000 veterans and their families. He continues to seek corporate partnerships to sponsor a family, capital improvement, or a program.

He is positioning the foundation to be a resource hub for the 126,000 veterans who call Maine home. A longer-term vision is to open one or two similar facilities in other parts of the country and expand to support Vietnam-era veterans. And he spends about 170 days a year on the road as a motivational speaker, inspiring others to overcome adversity, get off the sidelines, and get into the action.

Why press on so hard when life has hand-delivered an excuse to sit it out? Family, for one. In September, Mills became a father for a second time, welcoming a son, Dax. The name pays tribute to Daniel and Alexander, two medics who saved Mills’ life in Afghanistan.

The second is duty—honoring those who gave all, by giving back. “I know guys who didn’t make it back home to their families, and I did,” Mills said. “My situation is not life-ending. My situation is I just have a couple more steps in the morning. Put my arm on. Put my legs on. I’m thankful to still be here. Through all the smoke and the dirt and the dust, it’s all settled now, and I’m living life to the fullest and doing the best I can to make sure people understand that life goes on—and to never, ever give up, and to never quit.”

As you rush to work, run to pick up the kids, or scramble to make dinner, retirement may seem like a far-off dream. Or maybe you try to talk to your partner about planning for the future, only to end up in a fight about how much to save now so you can enjoy life later. You delay this money conversation hoping that, in time, it will get easier. The truth is that waiting can be detrimental to achieving a secure future. So the time to talk about retirement is now.

The unpleasant truth is that 31 percent of Americans have no retirement savings or pensions at all.1 Others have started saving for retirement but are unrealistic about how much they will need to live comfortably during their golden years. Almost half of couples report having no idea how much they will need to save to maintain their current lifestyle in retirement. Another 47 percent of partners disagree about the amount of money they will need to do so.2

The good news is that working with a trusted financial advisor helps. More than 90 percent of baby boomers who work with an advisor have money saved for retirement. They report feeling better prepared for this life transition.3

As Aaron J. Morris, vice president and financial advisor at CAPTRUST in Des Moines, Iowa, explains, “Many people have the idea in their minds that they have not saved enough for retirement, and they will have to work forever. That assumption is often proven wrong once they take the time to sit down with an advisor.”

The reason many clients feel better is they have a time and place to have a meaningful conversation about both the financial and non-financial matters related to retirement from when, where, and how to retire to how much money they need to achieve their vision.

Whether you are currently working with an advisor or not, here are three steps to help you begin this important money talk.

Step 1: Identify Your Retirement Mindset

Every person has a retirement mindset. This is the set of thoughts and beliefs each of us has about this life transition. As with any mindset, family money experiences related to work and retirement have an influence. For example, if you grew up in a family business where the patriarch went to work every day until he died, you may want to emulate this person. Or you may want to avoid this fate because you saw firsthand how it affected the business and the family. Either way, your family history impacts how you envision this next phase of life.

Do the exercise on the right to help you tap into your mindset. This can be done in an advisory meeting or as a couple.

Review your answers. Look for insight into how your retirement mindset impacts your goals, dreams, or priorities. Then share your responses and observations with each other. Practice active listening by trying to put yourself in the other person’s shoes. The goal is to listen and understand each other — not to negotiate a compromise or convince your partner that your mindset is the right one.

By discussing your respective retirement mindsets, you avoid focusing on dollars and cents and can concentrate on how your motivations steer you toward similar or different financial decisions.

Step 2: Embrace Differences

Half of couples surveyed found that they disagree on their expected retirement age.4 And that’s only one part of the retirement puzzle. Expect to find some areas where you don’t see eye to eye. Instead of viewing these as problematic, see them as opportunities to get to know your partner better.

For example, if you can’t wait to quit your day job, but your partner wants to work part-time, find out why. Ask open-ended questions, and discover what makes working important to him or her. Often the retirement goal or activity is different, but the value each of you is honoring is the same. Work may give your partner a creative outlet, while not working may provide you time to pursue your creative interests.

Expect conflicts to arise during retirement planning. Discussing these matters before transitioning to retirement is ideal. This way a plan can be put into place that incorporates individual and joint goals. So don’t avoid conflict; embrace it.

Step 3: Expect Mixed Emotions

Planning for this life transition can bring mixed feelings. At times you may feel excited and joyful; other times, fearful and anxious. For women, the emotional side of planning can be more pronounced. Women worry about running out of money in retirement or becoming a burden to their children.5 Healthcare costs are a concern for both genders. Nearly three-quarters of couples fret about being able to afford unexpected healthcare costs.6

When discussing retirement planning, expect and validate feelings that arise. Don’t judge a partner for having more intense feelings than your own. Respect each other’s experiences — even if they are at odds. An empathetic advisor can be helpful at this stage by acknowledging the non-financial aspects to retirement and developing a plan that addresses these emotions. According to Morris, “Our job is to help our clients maintain a healthy perspective while validating their concerns and anxieties.”

Like most money conversations, talking about retirement is not a one-time event. Instead, it is a series of conversations that happen over months, years, or even decades. It is easy to let daily life get in the way of looking ahead. But make a commitment to yourself and your family, and start the retirement money talk today.

Sources

1 Economic Well-Being of U.S. Households in 2014, Board of Governors
Federal Reserve System, May 2015.

2 Fidelity Investments Couples Retirement Study, Fidelity Investments, 2015.

3 Boomer Expectations for Retirement 2015, Insured Retired Institute, April 2015.

4 Fidelity Investments.

5 Women, Money and Power Study: Empowered and Underserved, Allianz, 2013.

6 Fidelity Investments.

Sometimes a glimmer of hope emerges from the darkest times of people’s lives. Such was the case for the Eure family of Raleigh, North Carolina.

Alice and Thad Eure Jr. were living the American dream in the 1950s and 1960s. Thad was an entrepreneur with a gift for starting restaurants. In 1960, he and a partner opened the Angus Barn, a large upscale steakhouse restaurant on the outskirts of Raleigh, and later they created Darryl’s, a casual dining restaurant chain. Thad also started the 42nd Street Oyster Bar and Fat Daddy’s, a burger concept.

The Eures had two beautiful, intelligent daughters, Van and Shelley, and a bright, athletic son, Thad J. Eure III. But in 1975, their teenage son started showing signs of mental illness, going through manic highs and extreme lows, says his sister Shelley Eure Belk.

“It was severe. We didn’t know what was going on. It was a scary time for our family. My mom and dad went to seek help for him, and in that process, they realized how little was known about mental illness,” she says.

“Through these struggles, I remember my mother poring through books and trying to learn as much as she could. My parents worked hard to find the right treatment,” Shelley says.

Over 10 years, the couple took their son to different physicians. He was hospitalized numerous times and spent time in seven different mental institutions. Doctors struggled with his diagnosis and told the family that more research needed to be done on mental illness, says Van Eure, owner of the Angus Barn.

He was later diagnosed with severe bipolar disorder and schizoaffective disorder. The latter is a chronic mental health condition characterized by symptoms of schizophrenia, such as hallucinations or delusions and symptoms of a mood disorder, such as mania and depression.

In 1984, the Eures established the Foundation of Hope for Research and Treatment of Mental Illness, which funds research to investigate the causes and potential treatments for a range of serious, debilitating mental illnesses, such as depression, schizophrenia, eating disorders, post-traumatic stress syndrome, addiction, and women’s mood disorders, including postpartum depression, says Shelley, who is executive director of the foundation.

Today, Thad III, who lives on his own, is under the care of a psychiatrist. He still struggles with the ups and downs that come with his illnesses. In a 2013 letter to foundation donors, he said that after the hospitalizations of his young adult years, his parents “reached a state of helplessness, hopelessness, frustration, and desperation.” But out of the “dark abyss came a fragile and delicate ray of light.”

Van says their dad wanted the foundation’s work to help others. “He said, ‘I may not be able to make my own son well, but I may be able to do something for other people who may be going through the same thing.’”

The foundation encourages scientists in the department of psychiatry at the University of North Carolina School of Medicine to submit research project ideas. The foundation’s scientific advisory board decides which will receive grants and awards money to pilot studies. “There are so many brilliant researchers with great ideas who need the opportunity to explore their theories,” Shelley says. This often leads to other opportunities for funding.

Since inception, the foundation has funded more than 125 scientific research grants totaling more than $4.7 million. And projects backed by the foundation have garnered more than $145 million in additional funding from the federal government and other sources, she says. “That’s the beauty of our organization. We are planting seeds.”

The research supported by the foundation is “quite remarkable,” says Dr. David Rubinow, chair of UNC’s department of psychiatry. “There are new forms of treatment, new targets of treatment, and new treatment delivery systems—all of which have emerged from grants that were initially supported by the Foundation of Hope.”

Steve Thanhauser, Van’s husband and a member of the foundation’s board of directors, says the group has backed the work of “cutting-edge researchers who are passionate about coming up with breakthrough cures.”

The nonprofit organization has also funded 36 community grants totaling more than $300,000 to support effective mental health treatment programs in the Raleigh area, Shelley says.

Although the foundation was established as an endowment from the Eures, it has grown into something bigger.

Before their father died of pancreatic cancer in 1988, he asked that any donations made in his honor go to mental health research, not cancer studies. He told his family, “I’ve lived a wonderful life, but the life my son’s living is not the kind of life anyone should have to live.”

His friends took his request to heart. The year after his death, a group of employees at the Angus Barn and his other restaurants started the Thad Eure Jr. Walk for Hope to raise awareness and money for the foundation. About 200 participants earned about $30,000 in the first walk, which stretched 12 miles from the Angus Barn to the 42nd Street Oyster Bar in downtown Raleigh.

After Alice Eure died in 1997, the name of the annual event, held the second Sunday of October, was changed to the Thad and Alice Eure Walk (www.walkforhope.com). It’s now a 10K walk/run, which begins and ends at the Angus Barn where there’s a celebration that includes food, beverages, and prizes donated by companies who sponsor the event. In October, more than 4,000 people participated.

Those who come often talk about their family members who suffer from mental illness, Van says. “It’s an incredibly emotionally fulfilling day. There’s no way you can leave there and not feel good about what you’ve been part of.”

Besides the walk, the foundation hosts Evening of Hope, an annual gala and auction. Past speakers have included Mariel Hemingway; Judy Collins; Zak Williams, the son of the late Robin Williams; and Ashley Judd, who has openly talked about her struggles with depression.

In his letter to donors, Thad III wrote: “It is the philosophy of the Eure Family that if we can help just one individual who suffers from chronic mental illness lead a better, more productive and meaningful life, then we have done something very special.”

Shelley says the Foundation of Hope has become so successful because of its ability to stay the course and not get off track. “We have built this organization one research project at a time, one donor at a time, one walker at a time.”

The 2008 and 2009 financial crisis forced many of our clients to streamline and, in many cases, reduce the headcount in their finance and human resources departments. These departments are usually the most involved in the ongoing management and oversight of employee retirement plans. While the economy has improved, we have not yet seen our clients add back the positions eliminated during the downturn to a great extent. Further, human resources and finance professionals have had other things, such as the Patient Protection and Affordable Care Act of 2010, occupying their time. Organizations are doing more with the same amount of people, including the oversight and management of their retirement plans.

Faced with financial market volatility, rising interest rates, regulatory scrutiny, and plan-related litigation activity on the rise, plan sponsors are looking for help managing their plans. In some cases, they are turning to their plan advisors, asking them to do more on their behalf. The result is an increase in plan sponsors engaging advisors in a discretionary capacity to select and monitor plan investments.

Decoding the Numbers

Engaging a professional to provide investment advice has been common for some time among plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). These advisory arrangements are referenced and contracted as ERISA § 3(21) engagements, or as some call them co-fiduciary arrangements. This naming convention comes from the section numbers within ERISA itself; Section 3 of ERISA provides term definitions.

The twenty-first item in the list defines a fiduciary. When sponsors engage investment advisors as 3(21) fiduciaries, they hire them to provide investment advice. These advisors are responsible for the analysis, tools, and advice they provide. Although plan sponsors may rely on the advice of their 3(21) investment advisors, the plan sponsors are responsible for any decisions made.

A more recent trend for defined contribution plan sponsors is to engage advisors for discretionary investment management. Doing this requires the investment advisor to contract as an ERISA § 3(38) fiduciary. As you may have guessed, this refers to ERISA Section 3’s thirty-eighth definition. Note that ERISA § 3(38) does not define “investment advisors with discretion,” nor does it say “here’s a way to transfer more risk to your investment advisor.” Rather, it defines investment managers as distinct fiduciaries contracted with full discretionary authority over plan investments and making plan investment decisions.

In a defined contribution plan, this means the investment manager may select, monitor, remove, and replace investment options offered to plan participants. An appropriately contracted and executed 3(38) arrangement frees the plan sponsor from the time involved in selecting and monitoring plan investment options and the liability associated with these decisions. As explained in ERISA § 405(d), “The plan sponsor and/or trustees of the plan are not liable for acts or omissions of the 3(38) investment manager, and are under no obligation to invest or otherwise manage any asset of the plan which is subject to the management of that investment manager.” The fact that ERISA outlines this protection makes engaging a 3(38) investment manager an appealing prospect for many plan sponsors.

So What’s Left to Do?

An ERISA § 3(38) arrangement represents the highest level of investment liability transfer possible under ERISA, but that doesn’t mean a plan sponsor has eliminated all investment-related fiduciary duties. As attorney Michael Abbott, an employee benefits partner at Gardere Wynne Sewell LLP, reminds us, “ERISA § 3(21) covers plan fiduciaries—including plan sponsors—to the extent such fiduciaries have any discretionary authority or discretionary responsibility relating to plan management or administration.”

But hiring a 3(38) investment manager is not a panacea. Abbott continues: “While engaging a 3(38) lessens your investment-related responsibilities and risk, it doesn’t absolve you completely or allow you to abdicate all investment fiduciary responsibilities.” The process of selecting and engaging a 3(38) itself is a fiduciary responsibility.

Engaging a 3(38) investment manager transfers the responsibility and risk associated with the selection and monitoring of the plan’s investment options. It is critical, however, that plan sponsors realize that even with an appropriately structured 3(38) arrangement, such sponsors “still have the responsibility to monitor their 3(38) and be aware of the ERISA-related liability associated with hiring, monitoring, and, if needed, replacing them,” according to Abbott.

An analogy may help clarify roles. Let’s say you bought a new home and are trying to decide how best to move your belongings. Your cheapest option would be to do the move yourself. In doing so, you perform all the work. If anything breaks during the move, there is no one to blame but yourself. You have retained all of the move’s liability.

Another option would be to pay someone to help you load the moving truck. In this scenario, that worker would be responsible for his role in the move. If he dropped a box of your fine china, he would be on the hook for what he damaged. Meanwhile, assuming he didn’t poorly pack the china, if the china cracked as you drove the rental truck across town, you would own the liability. Driving the truck was outside the scope of the worker’s role.

Finally, you could completely outsource the move by hiring a full-service moving company. Your mover’s contract includes an insurance policy to protect your items and removes your liability for broken items. Yet, even in this scenario, you will want to be on site, ensuring the movers do what you instructed them to do, placing boxes in the correct rooms and furniture against the right walls.

Hiring a 3(38) investment manager is like outsourcing your move. While you have outsourced the work and liability, you cannot step away from the process. You must still monitor the investment manager to make sure it is fulfilling its contractual obligations.

Building a Monitoring Framework

When they engage us as a 3(38) investment manager, clients often ask how they should monitor us. We have a unique perspective in answering this question because, in the course of business, we evaluate and monitor the investment managers whose products are present in our clients’ investment lineups. In fact, we have a dedicated team doing this every day, and the rigor we apply to that process influences how we suggest that you monitor a plan-level investment manager.

Below is a handful of questions to consider when creating a framework to monitor a 3(38) investment manager:

Fulfillment of Duties

We also suggest that you periodically ask your investment manager questions about its organization, perhaps annually, to ensure the firm you hired has not changed in a way that could impact its ability to fulfill its duties.

Organizational Due Diligence

Putting a Bow on it

As Abbott pointed out above, “a 3(38) arrangement is not a pass to abdicate all your investment fiduciary responsibilities.” Any move, whether it is across town or to a new fiduciary framework, requires a clear understanding of roles and responsibilities before making an informed decision.

Unless staffing trends reverse, the demands on human resources and finance departments lessen, or the complexity of managing retirement plans decreases, demand for defined contribution 3(38) investment manager services will continue to grow. If you are among the growing number of plan sponsors who finds the structure of a 3(38) arrangement optimal for your plan’s management, establishing a framework for evaluation is an important step to fulfilling the new, though lessened, responsibilities introduced by this arrangement.