3(21) and 3(38) Fiduciary Services

Plan sponsors are required by ERISA to provide an investment lineup for participants that has been prudently selected and monitored to minimize and control risk. To ease this burden, a retirement plan advisor may act as an ERISA 3(21) investment fiduciary with regard to the selection, monitoring, and replacement of plan investments or as an ERISA 3(38) fiduciary with full discretion regarding the selection, monitoring, and replacement of plan investments.

A retirement plan advisor can serve in either a 3(21) or 3(38) fiduciary capacity, and in some cases, both capacities. The needs and desires of the plan sponsor typically dictate the specific arrangement, which is predicated upon the subject of risk mitigation versus risk avoidance. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plans’ investment menus. Others want to shift responsibilities to a third party due to their lack of expertise and, ultimately, fear of exposure to liability.

Differences

Any individual is a fiduciary under Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or she renders investment advice for a fee (or has any authority or responsibility to do so); or if he or she has any discretionary responsibility in the administration of the retirement plan.

Section 3(38) defines an “investment manager” as a fiduciary due to their responsibility to manage the plan’s assets. ERISA provides that a plan sponsor can delegate the responsibility (and thus, likely the liability) of selecting, monitoring, and replacing investments to a 3(38) investment manager/fiduciary. A 3(38) fiduciary may only be a bank, an insurance company, or a registered investment advisor (RIA) subject to the Investment Advisers Act of 1940.

*Plan sponsors can choose from a menu of approved funds that the advisor maintains through the use of an IPS and the proprietary Scorecard System™.

**The advisor will build, monitor and make the necessary changes to the fund lineup for a plan.

Similarities

Anyone can call himself or herself a fiduciary, but a fiduciary is determined not only by title but by actions as well. Both 3(21) and 3(38) advisors accept fiduciary responsibility and adhere to ERISA §404(a)’s duty to serve solely in the interest of plan participants. In addition, both have to meet the “prudent expert” standard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor’s fiduciary status. Plan sponsors should consider the advisor’s experience, skill, and level of expertise, in addition to their desire to take on exposure to potential liability. If you have any questions, please contact us.

IMPORTANT DISCLOSURE INFORMATION