Understanding 3(21) and 3(38) Fiduciary Services for Your Practice’s Retirement Plan

By: Joe Dillon, CFP®
2 Minute Read

Retirement plan sponsors are required by the Employee Retirement Income Security Act (ERISA) to provide an investment lineup for participants that has been carefully selected and monitored to minimize and control risk. To ease this burden and limit exposure, a retirement plan advisor can serve a plan sponsor in either a 3(21) or 3(38) fiduciary capacity, or, in some cases, both capacities—as defined by ERISA.

The needs and desires of the plan sponsor typically dictate the specific arrangement—namely whether they’re more focused on risk mitigation or 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 time or expertise, and ultimately, fear of exposure to liability.

It’s important for practice leaders to understand the differences and similarities between 3(21) and 3(38) fiduciary services as they consider a third-party advisor and partner for their practice’s 401(k) plan.

The Differences

Any individual is a fiduciary under ERISA 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 “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 adviser (RIA) subject to the Investment Advisers Act of 1940, as amended.

Overview of 3(21)

  • State in writing fiduciary status
  • Follows Investment Policy Statement (IPS) to build an approved fund menu
  • Provides a list of approved funds
  • Assists with monitoring of approved fund menu
  • Makes recommendations for changes to approved fund menu
  • Recommends mapping guidelines
  • Provides documentation

Overview of 3(38)

  • State in writing fiduciary status
  • Drafts IPS & must follow the IPS to build the fund menu
  • Builds fund lineup
  • Monitors fund lineup
  • Makes changes to fund lineup
  • Determines mapping strategies
  • Provides documentation

The 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.

The Importance of a Trusted Plan Advisor

Working with a retirement plan advisor as your 3(21) or 3(38) fiduciary has great potential to limit your exposure to fiduciary liability, while reducing the time and expertise required to perform the plan’s ongoing investment monitoring and selection duties.

Most of the responsibility for (and virtually all responsibility in the case of a 3(38) engagement) investment-related decisions is shifted to the advisor, giving the plan sponsor greater peace of mind and time to focus on other aspects of their business.

To learn more about this topic or to request support from Curi Capital’s Retirement Plan Solutions team, plan sponsors are encouraged to reach out to Curi Capital at 984-202-2800.

Joe Dillon, CFP®

Joe Dillon is Curi Capital’s Managing Director of Retirement Plan Solutions, based in Raleigh, NC.

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Curi RMB Capital, LLC (“Curi RMB”), is an investment adviser in Chicago, IL with other large offices in Raleigh, NC, Denver, CO, and Milwaukee, WI. Curi RMB is registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of the firm’s current written disclosure brochure filed with the SEC which discusses, among other things, Curi RMB's business practices, services, and fees, is available through the SEC's website www.adviserinfo.sec.gov..