When it comes to group retirement plans, the roles of advisors can be confusing. Understanding the difference between ERISA 3(21) and 3(38) fiduciaries is crucial for trustees, committee members, and plan sponsors. These roles determine how much liability plan sponsors retain and how much control they can delegate to their advisor.
What Are 3(21) and 3(38) Fiduciaries?
Under ERISA (the Employee Retirement Income Security Act), advisors can serve in one of three ways:
- Non-fiduciary advisors: These advisors, often Broker-Dealers, have no legal duty to act in the best interests of the plan participants. Their advice can be self-serving and conflict-ridden.
- 3(21) fiduciaries: These advisors help with tasks like creating an Investment Policy Statement (IPS), selecting investments, and guiding the plan’s strategy. However, the plan sponsor retains the “final say” on decisions and, therefore, the liability.
- 3(38) fiduciaries: Known as the “Cadillac” of ERISA fiduciaries, 3(38) advisors are given discretion over the plan’s investment lineup. This means they take on full responsibility for investment decisions, transferring liability away from the plan sponsor.
Key Differences Between 3(21) and 3(38) Fiduciaries
The primary distinction lies in discretion.
- A 3(21) fiduciary offers advice and recommendations but leaves the ultimate decision-making to the plan sponsor. This arrangement means the sponsor still carries the legal risk.
- A 3(38) fiduciary has full discretion to make investment decisions, including managing the lineup and related fees. This delegation allows plan sponsors to transfer significant liability to the 3(38) fiduciary.
As ERISA attorney Ary Rosenbaum puts it: “In the number soup of ERISA fiduciaries, it is clear that the ERISA 3(38) fiduciary is the Cadillac of ERISA fiduciaries. There is nothing wrong with driving a Buick or Chevrolet, but the fact is that the 3(38) offers the plan sponsor the most liability protection.”
Protecting Your Plan and Participants
Plan sponsors must carefully review advisor contracts to confirm the level of fiduciary responsibility they’re engaging. Some advisors claim co-fiduciary status in their marketing materials, but their contracts may contain carve-outs that exempt them from true 3(21) or 3(38) accountability.
For added assurance, consult with an expert like an Ironview professional or an ERISA attorney to evaluate advisor contracts. This step ensures your plan receives the fiduciary care it needs while minimizing your company’s exposure to risk.
The Bottom Line
Choosing between a 3(21) and 3(38) fiduciary is a critical decision when implementing a group retirement plan. While both can offer valuable guidance, only a 3(38) fiduciary allows plan sponsors to fully delegate investment responsibilities and reduce liability. Make sure your advisor’s contract reflects their claims, and when in doubt, seek professional guidance.
About Ironview
Ironview is an independent, U.S. SEC regulated, Registered Investment Advisor (RIA) providing fiduciary oversight and investment advisory services to group retirement plan sponsors and plan participants. Ironview serves as both an ERISA 3(21) fiduciary and an ERISA 3(38) Investment Manager advising on plans governed by the Employee Retirement Income Security Act (ERISA). Ironview currently advises approximately 100 corporate clients with retirement plans ranging in size from approximately $1mm in plan assets to over $150mm in plan assets.