3(21) vs. 3(38) Fiduciaries – Understanding the Differences

As a plan sponsor you have a fiduciary responsibility to your plan participants. This fiduciary duty extends to all aspects of your organization’s 401(k) plan. One of the most important aspects of a 401(k) or any defined contribution retirement plan is the investment menu offered to the plan participants.

Hiring the right plan investment advisor is one of the most critical decisions that you will make. An equally important decision is whether that investment advisor should be a 3(21) fiduciary or a 3(38) fiduciary. We will look at the differences here.

What is a 3(21) fiduciary?

 A plan sponsor who hires an advisor as a 3(21) fiduciary is looking for help and advice but retains the decision-making authority over the plan’s investment selections.

An investment advisor who serves as a 3(21) fiduciary typically revises or drafts an investment policy statement for the sponsor to approve. The investment adviser periodically reviews and suggests changes to the plan’s investment lineup based on its investment expertise.

However, the 3(21) investment advisor’s role does not include the authority to make investment selection decisions on behalf of the plan. The 3(21) advisor provides recommendations to the plan sponsor which then makes the final decision as to whether to implement the advisor’s investment selection recommendations. A 3(21) advisor has no authority to independently make any changes to the plan’s investments.

What is a 3(38) fiduciary?

 If a plan sponsor wants to delegate the fiduciary responsibility for the plan’s investment choices, it would hire an advisor who serves as a 3(38) investment manager. A 3(38) investment manager is responsible for exercising discretion in selecting, managing, monitoring, and benchmarking the investment offerings of a retirement plan.

The plan sponsor delegates the authority to make changes in the plan’s investment lineup to the 3(38) advisor. The advisor makes and implements decisions to add or remove mutual funds or other investments that are offered within the plan. So in effect the 3(38) investment manager typically does everything a 3(21) advisor does with the addition of implementing the investment changes on a fully discretionary basis.

Delegation versus abdication

It is important for plan sponsors to understand that they bear the ultimate fiduciary responsibility for their company’s retirement plan. This means that even in the case of using a 3(38) fiduciary to manage the plan’s investment selections, the plan sponsor is still ultimately responsible for the actions of this advisor.

Important Information

Investors should consider a strategy’s investment objectives, risks, charges and expenses carefully before investing.