ERISA 3(21) and 3(38) Fiduciaries: The Key Differences
- 5 days ago
- 4 min read
Updated: 2 days ago
When managing retirement plans, employers often face complex decisions about who should oversee plan investments and fiduciary responsibilities. Two common types of fiduciaries under the Employee Retirement Income Security Act (ERISA) are the 3(21) and 3(38) fiduciaries. Understanding the differences between these roles is essential for plan sponsors who want to protect themselves from liability and ensure their employees' retirement assets are well managed.
This article explains the key distinctions between ERISA 3(21) and 3(38) fiduciaries, their responsibilities, and how each impacts plan sponsors and participants. By the end, you will have a clear understanding of which fiduciary arrangement might best suit your retirement plan needs.
What Is an ERISA Fiduciary?
Before diving into the differences, it helps to understand what an ERISA fiduciary is. Under ERISA, a fiduciary is anyone who exercises discretionary control or authority over plan management, plan assets, or provides investment advice for a fee. Fiduciaries must act in the best interest of plan participants and beneficiaries, adhering to duties of loyalty, prudence, and diversification.
ERISA fiduciaries can be individuals or entities such as investment advisors, trustees, or committees. The law holds them to a high standard to protect retirement plan assets.
ERISA 3(21) Fiduciary Explained
A 3(21) fiduciary acts as an investment advisor to the plan sponsor. This role involves recommending investment options and providing advice, but the ultimate decision-making authority remains with the plan sponsor.
Key Responsibilities of a 3(21) Fiduciary
Providing investment advice on plan options
Assisting with the selection and monitoring of investment choices
Offering ongoing recommendations based on market conditions and plan goals
Sharing fiduciary responsibility with the plan sponsor
What This Means for Plan Sponsors
Plan sponsors retain control over investment decisions but share fiduciary liability with the 3(21) fiduciary. If an investment choice results in losses, both parties could be held responsible if they failed to act prudently.
Example Scenario
Imagine a company hires a 3(21) fiduciary to advise on mutual funds for their 401(k) plan. The fiduciary recommends a mix of funds, but the company must approve the final lineup. If one fund underperforms due to poor management, both the company and the 3(21) fiduciary could face scrutiny.
ERISA 3(38) Fiduciary Explained
A 3(38) fiduciary takes on a more active role by assuming full discretionary authority over the plan’s investment decisions. This means the 3(38) fiduciary selects, monitors, and replaces investments without needing plan sponsor approval.
Key Responsibilities of a 3(38) Fiduciary
Full discretion to manage the plan’s investment lineup
Selecting and monitoring investment options
Making changes to the investment menu as needed
Bearing sole fiduciary responsibility for investment decisions
What This Means for Plan Sponsors
Plan sponsors delegate investment decision-making and fiduciary liability to the 3(38) fiduciary. This arrangement reduces the sponsor’s risk and administrative burden but requires trust in the fiduciary’s expertise.
Example Scenario
A company hires a 3(38) fiduciary to manage their 401(k) plan investments. The fiduciary regularly reviews fund performance and can replace underperforming funds without consulting the company. If an investment loses value, the 3(38) fiduciary is responsible, not the company.
Comparing 3(21) and 3(38) Fiduciaries Side by Side
ERISA 3(21) | ERISA 3(38) | |
Role | Non-Discretionary Investment Advisor | Discretionary Investment Manager |
Decision Authority | Shared with Plan Sponsor | Full authority over investment decisions |
Fiduciary Liability | Liability shared with plan sponsor | Sole liability |
Investment Changes | Requires plan sponsor approval | Can make changes independently |
Administrative Burden | Moderate, plan sponsor remains involved in decision making | Lower, fiduciary handles investments and plan sponsor maintains basic oversight |
Best for | Sponsors wanting advice but retaining control | Sponsors wanting to delegate investment risk |
Why Plan Sponsors Choose One Over the Other
Choosing between a 3(21) and 3(38) fiduciary depends on the plan sponsor’s willingness to share or delegate responsibility and their comfort level with investment decisions.
3(21) fiduciary suits sponsors who want expert advice but prefer to keep control over investments.
3(38) fiduciary fits sponsors who want to reduce their fiduciary risk and administrative work by handing over investment decisions to a trusted expert.
Practical Considerations for Plan Sponsors
When deciding which fiduciary to engage, consider these factors:
Fiduciary expertise: Does the fiduciary have a strong track record managing retirement plan investments?
Risk tolerance: How much fiduciary liability is the sponsor willing to accept?
Resources: Does the sponsor have the time and knowledge to oversee investment decisions?
Plan size and complexity: Larger plans may benefit more from a 3(38) fiduciary due to complexity.
Cost: 3(38) fiduciaries may charge higher fees for full discretion services.
How to Work Effectively with ERISA Fiduciaries
To get the most from either fiduciary type, plan sponsors should:
Clearly define roles and responsibilities in written agreements
Regularly review fiduciary performance and compliance
Maintain open communication with the fiduciary
Document all decisions and advice received
Stay informed about ERISA rules and fiduciary duties
Summary of Key Points
ERISA 3(21) fiduciaries provide investment advice but share decision-making and liability with plan sponsors.
ERISA 3(38) fiduciaries have full control over investment decisions and assume sole fiduciary responsibility.
Choosing between the two depends on how much control and liability the plan sponsor wants to retain.
Both fiduciary types require careful selection, clear agreements, and ongoing oversight.
Understanding these differences helps plan sponsors make informed decisions that protect their company and support their employees’ retirement goals. If you are unsure which fiduciary arrangement fits your plan, consult a qualified retirement plan advisor to discuss your options.
