Breaking Down the Difference Between 3(21) and 3(38) Fiduciaries

Breaking Down the Difference Between 3(21) and 3(38) Fiduciaries
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Fiduciary duties are often complex and in many instances, the individuals that are responsible for these duties may not even know it. J.P. Morgan’s 2017 Defined Contribution Plan Sponsor Survey asked respondents (all of which are dedicated plan fiduciaries) “Are you, yourself a fiduciary to your organization’s retirement plan(s)?” Of the respondents, 43 percent indicated that they were not aware that they were a fiduciary— an alarming fact, as fiduciaries can be held personally liable for failing to effectively meet these duties, expose the organization to costly litigation and put plan participants at risk.

The first step to safeguarding your organization is to make sure your plan fiduciaries are aware of and understand their responsibilities under ERISA. Adding a consultant to your 401(k) or 403(b) retirement plan can help by providing a knowledgeable resource and in some cases by mitigating the risk through a co-fiduciary. Under the Prudent Expert Standard of ERISA, it may even be required. There are two classes of investment fiduciaries you can consider for your organization’s retirement plan: a 3(21) and 3(38) fiduciary. A recent article by Investment News breaks down the difference and some pros and cons of each.

3(21) Fiduciary – “A 3(21) investment adviser is a co-fiduciary role, whereby an adviser provides advice to an employer with respect to funds on a 401(k) investment menu, and the employer retains the discretion to accept or reject the advice.”

According to Fi360 Global Fiduciary Insights, a 3(21) fiduciary is an advisor without discretion. The investment decisions continue to rest with the Plan Sponsor. This class of fiduciary is responsible for:

  • Recommending investments
  • Monitoring investments
  • Suggesting replacements
  • Providing participant education
  • Advising the plan sponsor in following a fiduciary process

3(38) Fiduciary – “A 3(38) adviser has the discretion to make fund decisions. The plan sponsor has less liability in this relationship because they offload fiduciary risk for investments to the adviser; however, employers still carry a fiduciary duty to monitor the adviser.”

The same Fi360 webinar presentation indicated that a 3(38) fiduciary serves as an investment manager that is appointed by the plan sponsor to manage the investment process of the retirement plan. This class of fiduciary will:

  • Have a written agreement with the plan sponsor
  • Acknowledge fiduciary status in writing
  • Make decisions with fiduciary discretionary authority
  • Have discretion in selecting, monitoring and replacing plan options
  • Relieve the plan sponsor of fiduciary duties

In a recent blog, ForUsAll provides a helpful table that lays out the differences as well.

Plan sponsors should be able to identify if they have a consultant that is acting as a 3(21) or 3(38) Fiduciary without hesitation. RCM&D Retirement Services recommends that all retirement plans should have a consultant acting in either a 3(21) or 3(38) capacity.  Even non-ERISA 403(b) plans should have consultants acting under the premise of a 3(21) or 3(38) as a best practice. Reach out to a trusted RCM&D retirement advisor to learn more.