Retirement plan advisors can serve in a 3(21) or 3(38) fiduciary capacity or in some cases, both. The needs and desires of the plan sponsor dictate the specific arrangements. Such decisions are normally predicated upon risk mitigation versus risk avoidance. While some plan sponsors want assistance with their fiduciary responsibilities but elect to maintain discretion and control of their plan’s investment menus, others will choose to shift fiduciary responsibilities to a third party due to a lack of expertise or fear of liability.
Differences between a 3(21) and 3(38) fiduciary
Under Section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA), an individual or individuals at the plan sponsor level shoulder the responsibilities of a fiduciary for the company’s retirement plan. This fiduciary role can be assumed with intentionality or by default; ERISA considers anyone who engages in certain activities to be a fiduciary. These activities include: exercising authority or control over the management of a plan or its assets; rendering investment advice for a fee (or with the authority or responsibility to do so); or, taking on any discretionary responsibility in the administration of a plan.
When a plan sponsor engages a Section 3(38) fiduciary, an investment manager/plan provider will accept sole responsibility for the selection, monitoring, and replacement of plan investment options as well as the day-to-day decisions made on behalf of the plan. With a 3(38), the plan sponsor is relieved of responsibility for the investment manager’s decisions under ERISA Section 405(d)(1).
| 3(21) | 3(38) | |
| States co-fiduciary status in writing | States co-fiduciary status in writing | |
| Assists in drafting Investment Policy Statement (IPS) | Drafts IPS | |
| Helps design initial fund menu | Builds initial fund menu | |
| Provides monitoring | Monitors menu | |
| Recommends changes | Makes changes | |
| Recommends mapping strategies | Determines mapping strategies | |
| Provides documentation | Provides documentation |
Similarities between a 3(21) and 3(38) fiduciary
Both 3(21) and 3(38) advisors accept fiduciary responsibility and serve solely in the interest of plan participants. Both are required to meet the “prudent man” standard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of the advisor’s fiduciary status. Plan sponsors should consider an advisor’s experience, skill and level of expertise in addition to their desire to take on exposure to potential liability.
