• Vitaly Novok

3(21) Fiduciary Adviser Vs. 3(38) Investment Manager. Know the Difference!

The complexity of the Employee Retirement Income Security Act (ERISA) and the myriad of DOL regulations leave many plan sponsors incognizant of the true responsibility they have to carry. Many plan sponsors have heard the term “fiduciary,” but not many even know who the fiduciary is within their own organization.


The frequency of lawsuits filed against plan sponsors of all sizes is increasing. Therefore, they can no longer remain unaware of their fiduciary responsibilities and hope that things will continue to slide.


Many recent lawsuits filed against plan sponsors relates to investment portion of plan management. Therefore, plan sponsors need to be both knowledgeable and experienced in managing, selecting, and monitoring investments. If not, simply delegate a portion of their fiduciary responsibility to qualified advisers.


For many plan sponsors, delegating fiduciary responsibility may be the lesser of two evils. For instance, it allows them to focus on their core business and day-to-day operations while the plan’s investments are under control, in compliance with all regulations, and aligned with the employees’ best interests.


Who Do You Delegate Your Fiduciary Responsibility To?


When it comes to managing plan investments, plan sponsors should be aware of two key service providers that can help them mitigate a part of their responsibility: 3(21) fiduciary adviser and 3(38) investment manager. Despite both being fiduciaries, there are significant differences between their responsibilities and the scope of their responsibilities. Plan sponsors should know the difference between them before deciding who to pick.


3(21) Fiduciary Adviser


A 3(21) fiduciary adviser is a professional who is paid to provide investment advice, and recommendations to the retirement plan sponsors. In addition to that, 3(21) fiduciaries are responsible for assisting in drafting investment policy statements, monitoring investments, and participant education. It’s essential that plan sponsors should know that fiduciaries acting under this capacity are not responsible for making final decisions, nor do they have discretion. The final word is made by a plan sponsor or a trustee.


For example, a 3(21) fiduciary can recommend replacing some investments within the investment menu. However, it will be up to the plan sponsor to either accept the recommendation or reject it. To make things simpler, think about 3(21) fiduciaries as “co-fiduciaries,” meaning they share fiduciary responsibility with plan sponsors. If a recommendation is made by the 3(21) fiduciary and implemented by the plan sponsor, but then turns out to be a breach of fiduciary duty, both will be held liable.


Despite acting as a co-fiduciary, 3(21) fiduciaries must be knowledgeable and act solely in the best interests of the plan and its participants.


3(38) Investment Manager


Unlike their counter parts, 3(38) investment managers are appointed by the plan sponsor, have complete discretion over the plan’s investments, and assume all responsibility for their investment actions. 3(38) fiduciaries can add or replace investments, as well as manage plan assets without consent from the plan sponsor’s committee or trustee. This may be especially important during periods of high market volatility or downturns as the 3(38) fiduciary can take appropriate actions much faster.


Only registered investment advisers, banks, or insurance companies can act in the capacity of a 3(38) fiduciary.


A crucial difference between 3(21) and 3(38) fiduciaries is that 3(38) fiduciaries relieve plan sponsors of the legal liability of an investment manager’s investment decisions. For example, if there is a breach of fiduciary duty upon making an investment decision, only a 3(38) fiduciary will be held liable for that decision. Not a plan sponsor. The transfer of fiduciary liability is the biggest driver motive for why so many plan sponsors lean towards hiring a 3(38) fiduciary.



Who Should You Choose?


Unfortunately, there is no one-size-fits-all solution. The answer to the question above depends on the needs, and goals of a specific plan sponsor.


If a plan sponsor has investment expertise but would like to get a second opinion from a qualified investment professional while retaining control over investment decisions, then a 3(21) fiduciary adviser is probably the best choice. 3(21) fiduciaries will keep plan sponsors updated on new developments happening in the investment world, monitor investment funds, suggest replacements when cheaper alternatives are available, and will cost less.


On the other hand, if the goal is to completely avoid dealing with investment decisions and shift the responsibility of investment decisions to a third-party, then hiring a 3(38) investment manager would be a much better option. Yes, as a plan sponsor, you will lose control of which funds to add or remove, and yes, a 3(38) investment manager costs more. But the peace of mind you get from knowing your plan investments are in the good hands of an investment manager who is solely responsible for decisions, is definitely worth every penny.


If you decide to hire a 3(38) investment manager, don’t to get too excited. Just because the 3(38) fiduciary is responsible and liable for investment decisions, doesn’t mean that you are off the hook. As a plan sponsor, you have a fiduciary responsibility to monitor the investment manager and make sure they act prudently. Moreover, you need to be sure that the fee you pay for the services is reasonable.

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