ERISA 3(38) VS ERISA 3(21) Fiduciaries

Introduction

When managing retirement plans, employers and plan sponsors often turn to other fiduciaries to help navigate the complex landscape of the Employee Retirement Income Security Act (ERISA). Under ERISA, fiduciaries are entrusted with managing and overseeing retirement plans in the best interests of the participants and beneficiaries. However, different types of fiduciaries are defined under ERISA, with ERISA 3(38) and ERISA 3(21) being two commonly referenced categories. This blog post will delve into the distinctions between ERISA 3(38) and ERISA 3(21) fiduciaries to shed light on their roles and responsibilities.

ERISA 3(38) Fiduciary 

ERISA 3(38) fiduciaries, also known as investment managers, hold higher responsibility and authority than ERISA 3(21) fiduciaries. A plan sponsor can delegate investment management functions to an ERISA 3(38) fiduciary. Their duties include selecting, monitoring, and replacing investment options within the retirement plan. The plan sponsor transfers the responsibility associated with investment decisions to the 3(38) fiduciary.

Keep in mind, though you can hire a 3(38) investment fiduciary for your 401(k), you should still have a process for choosing the 3(38) fiduciary. Not all financial advisors can act in a 3(38) fiduciary capacity. And all 3(38) providers manage investments differently. Though a 3(38) fiduciary takes on investment selection responsibility, it is still the responsibility of plan fiduciaries to have a prudent process in selecting the 3(38).  

Key Features of ERISA 3(38) Fiduciaries

1. Investment Selection and Monitoring

   The ERISA 3(38) fiduciary can choose and manage the investment options available within the retirement plan. Generally, the 3(38) fiduciary will develop and maintain an investment policy statement to guide the decisions made regarding investment selection and monitoring. 

2. Fiduciary Liability

   By designating an ERISA 3(38) fiduciary, the plan sponsor transfers the fiduciary liability for investment decisions to the appointed fiduciary. As mentioned above, the plan fiduciaries are still responsible for selecting and monitoring the 3(38) Fiduciary.

3. Investment Expertise

   ERISA 3(38) fiduciaries are typically investment professionals or firms with expertise in managing retirement plan assets. This aspect can be helpful if you are involved in managing your organization's 401(k) plan but don't have the expertise to manage the investment lineup.  

Remember that 3(38) fiduciaries complete their responsibilities in several ways. For example, some 3(38) fiduciaries put out a general fund lineup, not tailored to specific retirement plans. Other 3(38) fiduciaries tailor their recommendations to the 401(k) plan they serve. 

ERISA 3(21) Fiduciary 

Unlike ERISA 3(38) fiduciaries, ERISA 3(21) fiduciaries do not have the authority to make investment decisions on behalf of the retirement plan. Instead, they serve in an advisory capacity and provide recommendations to the plan sponsor, who retains the final decision-making authority.

It is more common for financial advisors to have the ability to act in a 3(21) fiduciary capacity than it is for an advisor to be a 3(38) fiduciary. This is likely because there is less liability for an advisor to act as a 3(21) than a 3(38) fiduciary. 

Key features of ERISA 3(21) fiduciaries include

1. Investment Advice

   ERISA 3(21) fiduciaries offer advice and recommendations to the plan sponsor regarding selecting and monitoring investment options within the retirement plan. A 3(21) fiduciary recommends fund changes rather than managing the funds.  

2. No Decision-Making Authority

   The plan sponsor retains the responsibility for making investment decisions, considering the advice provided by the ERISA 3(21) fiduciary. This point is a significant distinction from a 3(38) fiduciary. Generally, the 3(21) advisor will present their recommendation to the plan sponsor and rely on the plan sponsor to complete the final sign-off. The advisor does not have discretionary authority.

3. Shared Liability

   While the ERISA 3(21) fiduciary shares the fiduciary responsibility with the plan sponsor, the ultimate decision-making authority lies with the plan sponsor. Without the plan sponsor's approval, no investment changes will be made.

3(38) Fiduciaries have many advantages, but some 3(21) fiduciary setups can have more flexibility. For example, if you are using a 3(38) provider with a set lineup, you may be unable to add specific investments to the lineup that you feel may be a better fit for your employees. By being the final signer in a 3(21) setup, you have flexibility in your investment lineup decisions.  

Comparing ERISA 3(38) and ERISA 3(21) Fiduciaries

1. Authority

   The primary distinction between the two fiduciaries is the authority and liability of investment decisions. ERISA 3(38) fiduciaries assume the responsibility for investment decisions, while ERISA 3(21) fiduciaries provide advice but do not have decision-making authority. The keyword distinguishing 3(38) from 3(21) fiduciaries is discretion.  

2. Investment Expertise

   ERISA 3(38) fiduciaries are generally investment professionals or firms with specialized knowledge and experience managing retirement plan assets. ERISA 3(21) fiduciaries may possess investment expertise but primarily offer guidance and recommendations to the plan sponsor.

3. Liability

   By appointing an ERISA 3(38) fiduciary, the plan sponsor can transfer liability associated with investment decisions. With an ERISA 3(21) fiduciary, the plan sponsor retains the fiduciary responsibility, although they may seek advice from the fiduciary.

Conclusion 

Understanding the differences between ERISA 3(38) and ERISA 3(21) fiduciaries is crucial for plan sponsors and employers seeking professional assistance in managing retirement plans. The choice between these two fiduciaries depends on the control the plan sponsor wishes to maintain and their comfort with assuming fiduciary liability. Ultimately, consulting with legal and financial professionals is recommended to ensure compliance with ERISA regulations and to make informed decisions regarding fiduciary responsibilities.

Our retirement plan team can act in a 3(38) or 3(21) fiduciary capacity. We can help you review your options. Our office is in Salt Lake City, UT, but we provide 3(38) fiduciary services to clients in many states.