I think you may be working on old information there, mal.
Pathology residency used to be 5 years (for AP/CP). The 5 year requirement could be met in two ways:
1) Do a prelim year/transitional year, then 4 years of AP/CP.
2) Go right into AP/CP, then do a credentialing year which was a fellowship (often surg path or cyto).
A couple of years ago the requirement for 5 years was dropped, and made into 4 years. At the same time, the transitional year/prelim year option was also dropped. Thus, you can do a prelim year, but you are not shortening your residency. People still do fellowships, but you can do the 4 year residency and get a job without doing any extra time, depending on what kind of job you want. You don't have to do a fellowship.
The rotations and goals of residency haven't really changed. There has always been a requirement for 18 months of AP, 18 months of CP, plus 12 months elective. Not much of the requirements were ever done during the 5th year anyway.
For people who did Post-soph fellowships, this also used to count for that extra, 5th year. But with the change to 4 years only, it no longer counts, so those of us who did a PSF are SOL, although that wasn't really a big attraction for me anyway.
Thus, if you really want to do a transitional year and take step III then, go ahead, but it's a waste of time unless you really like that sort of stuff. As far as I know you can take Step III anytime during residency.