What Is an ERISA 3(38) Fiduciary, and Is It Right for Your Plan?

Managing a 401(k) plan involves navigating complex regulations, investment decisions, and fiduciary responsibilities. For employers looking to reduce their liability and streamline plan management, an ERISA 3(38) fiduciary may be the ideal solution. Unlike a 3(21) fiduciary who provides advice but leaves decision-making in the hands of the plan sponsor, a 3(38) fiduciary assumes full discretionary control over investment decisions.

• What is the role of a 3(38) fiduciary?
• What are their key responsibilities?
• Why do some plan sponsors choose a 3(38) fiduciary instead of a 3(21) advisor?

What Is a 3(38) Fiduciary?

Under ERISA, a 3(38) investment manager is a fiduciary who assumes full responsibility for the selection, monitoring, and replacement of a retirement plan’s investment options. Once appointed, the 3(38) fiduciary has the authority to make investment decisions without requiring approval from the plan sponsor.

This delegation shifts the fiduciary liability for investment-related decisions from the plan sponsor to the 3(38) fiduciary. However, the plan sponsor retains the responsibility to prudently select and monitor the 3(38) fiduciary itself.

Key Responsibilities of a 3(38) Fiduciary

A 3(38) fiduciary plays a hands-on role in managing the plan’s investments. Their responsibilities include:

1. Selecting Investment Options
   • Constructing and maintaining a diversified lineup of investment options that align with the plan’s objectives and the needs of participants.
2. Monitoring Investment Performance
   • Regularly reviewing investments to ensure they meet ERISA’s prudence standards.
   • Replacing underperforming funds when necessary.
3. Maintaining Compliance
   • Ensuring all investment decisions comply with ERISA regulations and industry best practices.
4. Providing Documentation
   • Keeping detailed records of all decisions to demonstrate adherence to fiduciary standards.

Why Choose a 3(38) Fiduciary Over a 3(21) Advisor?

Both 3(21) and 3(38) fiduciaries help plan sponsors meet their obligations under ERISA, but the two roles differ significantly in terms of control, liability, and the level of involvement required from the plan sponsor. 

Here’s why some organizations prefer a 3(38) fiduciary:

1. Reduced Liability

With a 3(38) fiduciary, the plan sponsor shifts the legal responsibility for investment decisions. If a fund underperforms or fails to meet fiduciary standards, the 3(38) fiduciary—not the sponsor—is held accountable.

2. Hands-Off Investment Management

Plan sponsors who want to outsource investment decisions can delegate this responsibility entirely to a 3(38) fiduciary. This approach frees up internal resources and allows the sponsor to focus on other aspects of plan administration.

3. Simplified Decision-Making

Unlike a 3(21) advisor, who works collaboratively with the sponsor, a 3(38) fiduciary operates independently. Sponsors don’t need to approve or oversee investment changes, which streamlines the decision-making process.

4. Expertise and Accountability

A 3(38) fiduciary is typically a highly qualified investment professional with the expertise to manage complex portfolios. Their sole responsibility is to ensure the plan’s investments are prudently managed and aligned with participant needs.

5. Peace of Mind

By delegating investment decisions to a 3(38) fiduciary, sponsors can reduce stress and ensure their plan is in compliance with ERISA, even as regulations evolve.

Comparing 3(21) and 3(38) Fiduciaries

Here’s a quick overview of how a 3(38) fiduciary differs from a 3(21) advisor:

Aspect	3(21) Fiduciary	3(38) Fiduciary
Decision-Making	Provides advice and recommendations, but the plan sponsor makes the final decisions.	Full discretionary control over investment decisions.
Fiduciary Liability	Shared between plan sponsor and advisor.	Assumed entirely by the 3(38) fiduciary.
Level of Involvement	Plan sponsor collaborates with advisor on decisions.	Plan sponsor delegates all investment decisions.
Best For	Sponsors seeking guidance but wanting to stay involved.	Sponsors who prefer a hands-off approach or reduced liability.

Disclaimer: This comparison is for general informational purposes only and should not replace a thorough review of your specific service agreement with your recordkeeper or other providers. I am not an attorney, and this does not constitute legal advice.

How to Choose a 3(38) Fiduciary

When selecting a 3(38) fiduciary, consider:

1. Experience and Credentials: Look for a fiduciary with deep industry expertise and a proven track record of managing retirement plan investments.
2. Fee Structure: Ensure their fees align with the services provided and are reasonable compared to market standards.
3. Reputation and References: Research their reputation and ask for client references to verify their reliability and professionalism.
4. Documentation: Confirm they provide detailed records of all decisions to ensure compliance and protect your plan.

An ERISA 3(38) fiduciary offers plan sponsors the ultimate in professional investment management and liability protection. 

By delegating investment decisions, sponsors can reduce risk, streamline plan operations, and ensure participants have access to high-quality investment options.

If you’re considering a 3(38) fiduciary or want to learn more about how they compare to other fiduciary models, contact us. We’ll help you determine if this hands-off approach is the right fit for your organization and employees.

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Disclaimer: This is general information and should not replace a detailed review of your specific service agreement with your retirement plan providers. I am not an attorney, and this does not constitute legal advice.