3(21) vs. 3(38) Fiduciaries: Understanding the Key Differences
When it comes to managing a company’s retirement plan, selecting the right fiduciary partner is one of the most important decisions a plan sponsor will make. Two common types of fiduciaries under ERISA are 3(21) investment advisors and 3(38) investment managers. While both play critical roles in helping plan sponsors meet their fiduciary responsibilities, the level of responsibility and liability they assume differs significantly. Let’s break down these roles to help you understand which may be the best fit for your plan.
ERISA and the Role of Fiduciaries
ERISA defines fiduciaries as individuals or entities that exercise discretionary control over a retirement plan’s management or assets or provide investment advice for a fee. Fiduciaries are held to the highest standard of care and must act solely in the best interest of plan participants.
To help plan sponsors manage their responsibilities, ERISA allows for the delegation of certain fiduciary duties. This is where 3(21) and 3(38) fiduciaries come into play.
What Is a 3(21) Fiduciary?
A 3(21) fiduciary serves as a co-fiduciary to the retirement plan. They provide investment advice to the plan sponsor, helping them make informed decisions, but they do not have discretionary control over investment decisions.
Responsibilities of a 3(21) Fiduciary:
- Conducting due diligence on investment options.
- Recommending investment lineups aligned with the plan’s goals and objectives.
- Advising on replacing underperforming funds.
- Helping the plan sponsor maintain compliance with fiduciary obligations.
In this role, the plan sponsor retains the final decision-making authority over investments and ultimately shares fiduciary liability with the 3(21) advisor.
Benefits of a 3(21) Fiduciary:
- Provides professional guidance without ceding control.
- Cost-effective compared to 3(38) services.
- Allows plan sponsors to remain actively involved in investment decisions.
This is a good option for employers who want expert advice but are comfortable taking on the responsibility for final decisions.
What Is a 3(38) Fiduciary?
A 3(38) fiduciary is an investment manager who assumes full discretionary control over the retirement plan’s investment decisions. Once appointed, they take on the legal responsibility for selecting, monitoring, and replacing the plan’s investments.
Responsibilities of a 3(38) Fiduciary:
- Selecting and managing the investment lineup.
- Monitoring investment performance and making adjustments as necessary.
- Ensuring the plan’s investment options meet ERISA’s diversification and prudence requirements.
- Providing documentation to demonstrate compliance with fiduciary obligations.
With a 3(38) fiduciary, the plan sponsor delegates investment decision-making and associated liability to the fiduciary. This significantly reduces the plan sponsor’s risk.
Benefits of a 3(38) Fiduciary:
- Transfers fiduciary liability for investment decisions to the 3(38) fiduciary.
- Frees up time and resources for the plan sponsor to focus on other responsibilities.
- Provides peace of mind with expert management of investments.
This option is ideal for plan sponsors who prefer a hands-off approach to manage investment decisions effectively.
Key Differences Between 3(21) and 3(38) Fiduciaries
Aspect | 3(21) Fiduciary | 3(38) Fiduciary |
Decision-Making Authority | Advisory—plan sponsor retains final decision-making authority. | Discretionary—full control over investment decisions. |
Liability | Shared liability with the plan sponsor. | Assumes full liability for investment decisions. |
Level of Involvement | Collaborative—works alongside the plan sponsor. | Independent—acts on behalf of the plan sponsor. |
Cost | Typically lower fees. | Higher fees due to increased responsibility. |
Which Fiduciary Is Right for Your Plan?
Choosing between a 3(21) and a 3(38) fiduciary depends on your organization’s needs, resources, and level of comfort with fiduciary responsibilities.
- 3(21) Fiduciary:
- Best for plan sponsors who want professional guidance but wish to stay actively involved in investment decisions.
- Ideal for those with the expertise and resources to fulfill their fiduciary obligations.
- 3(38) Fiduciary:
- Best for plan sponsors looking to transfer investment decision-making and associated liability.
- Ideal for those with limited time or investment expertise.
Making the Right Decision
Regardless of which fiduciary model you choose, partnering with a trusted and experienced professional is critical to your plan’s success. Both 3(21) and 3(38) fiduciaries can help you navigate ERISA compliance, but the right choice will depend on your specific goals and comfort level with responsibility.If you’re ready to evaluate your plan’s fiduciary structure or explore how a 3(21) or 3(38) fiduciary can support your organization, contact us today. We’ll work with you to find the solution that aligns with your needs and ensures your employees are set up for retirement success.