3(21) vs. 3(38): Understanding the Numbers

As employers review potential retirement plan advisors, it can be important to understand is the difference between an ERISA 3(21) and ERISA 3(38) investment fiduciary. Let’s look at the features of both and how they can impact your business’s retirement planning process.

3(21) Investment Advisor

  • Provides Advice: Makes recommendations. The plan sponsor / employer makes the final investment decisions and may accept, reject, or postpone the advisor’s recommendation.
  • Shared Liability: The advisor and plan sponsor / employer each bear fiduciary responsibility for their own role.
  • 3(21) Does Not Sign Paperwork: Because the plan sponsor makes the final decision on investment recommendations, they must sign the investment change paperwork to implement the changes recommended by their 3(21) Advisor.

3(38) Investment Manager

  • Full Discretion: Implements initial menu and necessary changes without the need for approval from the plan sponsor. The plan sponsor always retains the ability to terminate the services of the 3(38) fiduciary.
  • Delegation of Liability: ERISA 3(38) specifically permits the plan sponsor to delegate the investment decisions and transfer the liability for selection and monitoring of investments, retaining only the responsibility to ensure that the 3(38) fiduciary investment manager is qualified and performing as required.1
  • The 3(38) Investment Manager Signs the Investment Paperwork: Since the investment manager has discretionary authority, he or she takes the task out of the plan sponsor’s hands of coordinating

Each of these approaches can have pros and cons that go along with them, and each can get the job done if properly implemented.

1. IRC § 405(d)(1): If an investment manager or managers have been appointed under section 402(c)(3), then no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any assets of the plan which is subject to the management of such investment manager.