3(21) vs 3(38) Fiduciary Risk Management

Retirement planning has changed dramatically over the years, and one of the biggest areas of development has been in 401(k) plans. Established in 1978, 401(k) plans are named after the section of the tax code that created them. Originally, they were intended to supplement Social Security and traditional pension plans, but over the years since, 401(k) plans have become the primary vehicle for employees to save for retirement.

As 401(k) plans have grown, so has legislation to protect plan participants. Rules were established to make sure participants were treated fairly, that they are offered the best benefits available, and that there are no conflicts of interest with plan sponsors and 401K advisors.

Fiduciary Responsibility

As 401(k) plans evolved, plan sponsors started seeking professional help, both to administer the plans according to government and regulatory standards and help the company manage risks associated with the plan. There are a number of different types of plan advisors that assume part (but not all) of your fiduciary responsibilities and risk. It’s important to remember that plan sponsors always share in the fiduciary responsibility. Different types of plan advisors include:

  • ERISA 3(21) Investment Advisor. This advisor shares the fiduciary risk with plan sponsors and can help guide you through the various responsibilities and liabilities.
  • ERISA 3(38) Investment Manager. This advisor takes the risk of selecting investments, monitoring their performance, and replacing them when necessary.

3(21) Investment Fiduciaries: Partners in Your Plan

Establishing a qualified retirement plan, like a 401(k), for employees is an important benefit many companies offer. However, it’s a large responsibility, and often plan sponsors don’t completely understand their roles, and the roles of the advisors they hire to help them administer the plan. One area of confusion is the difference between the types of advisors that provide plan services, like 3(21) and 3(38) plan fiduciaries.

Let’s Look at the Numbers

Qualified plans like 401(k)s are defined by rules set out in the Employee Retirement Income Security Act of 1974, or ERISA. ERISA’s Section 3 specifically defines who is responsible for operating an employee benefit plan, and the 21st definition outlines plan fiduciaries. That’s where the term 3(21) investment fiduciary comes from, and those fiduciaries include:

  • Anyone who makes decisions about the plan’s management or its investments, including hiring other plan advisors or selecting investment choices for employees.
  • Anyone who makes decisions about the plan’s administration, including deciding which employees are eligible to become participants or deciding on benefit claims.
  • Anyone who is paid to provide investment advice to the plan.

As the plan’s sponsor, you are ultimately the final decision-maker, even if you’ve delegated responsibilities to other advisors, so you are automatically a 3(21) plan fiduciary. And ERISA also requires that you, as a plan fiduciary, must operate the plan for the exclusive benefit of participants, and that you must act with “care, skill, prudence, and diligence.”

Sharing the Load

That can be a daunting prospect. Many plan sponsors don’t have the expertise they need to administer a 401(k) plan, select investments, and properly document their decisions. That’s why plan sponsors hire 3(21) fiduciaries. A 3(21) plan advisor acts as a co-fiduciary, helping you run the plan and also sharing any liability with other plan fiduciaries, like members of your investment committee and board members. The 3(21) advisor offers you the expertise to effectively manage your plan.

Even with a 3(21) fiduciary partner, the plan sponsor is still primarily responsible for their plan’s investments. Plan sponsors that want to delegate fiduciary responsibility for selecting and managing the plan’s investment options need to hire a 3(38) plan fiduciary, which is a registered investment advisor, bank, or insurance company that has the authority to independently buy, sell, and manage the plan’s investments. A 3(38) plan fiduciary must acknowledge responsibility for the plan in writing. Plan sponsors are still responsible for prudently selecting and monitoring a 3(38) fiduciary, but as long as they do so, they won’t be liable for the acts or omissions of the investment manager with respect to investment decisions.

What Does Your Plan Need?

There’s no simple answer that determines which type of fiduciary is best for a particular plan. Sponsors who want to minimize their fiduciary risk and are comfortable in giving up investment control may want the help of a 3(38) fiduciary. Sponsors who want to keep control over investment decisions and are confident in their risk management may want a 3(21) fiduciary. Whatever your particular needs, FiduciaryFirst can help you. Contact us to schedule a review of your plan and we can work with you to determine the type of plan fiduciary that will serve you and your participants best.

3(38) Investment Fiduciaries: Shouldering Your Plan Responsibilities

Qualified retirement plans, like 401(k)s, are unfamiliar territory to many, or even most, businesses. But they are an increasingly important method for those businesses to attract and retain talented employees. That means, it’s important for plan sponsors to understand the basic elements of qualified plans.

The Employment Retirement Income Security Act of 1974 (ERISA) is the main law that governs employee benefit plans, like 401(k) plans. Section 3 of ERISA defines the terminology used by ERISA, including the 21st definition, fiduciary. “Fiduciary” is a very broad term that encompasses a wide range of roles. In general, a fiduciary is anyone who makes decisions about managing the retirement plan or its investments, anyone who makes decisions about administering the plan, and anyone who is paid to provide investment advice to the plan. As a plan sponsor, you are a plan fiduciary, and while you can delegate some of your responsibilities to other fiduciaries, you can’t delegate all of your responsibilities.

Who Can Help?

So who can help you with your fiduciary duties? A more specific term that’s defined by ERISA is “investment manager,” which is the 38th definition provided by ERISA. A 3(38) investment manager is a special type of fiduciary that’s been appointed by the plan sponsor to have full discretionary authority over investment decisions, and can select, remove, and replace the plan’s investment options. A 3(38) manager must be a registered investment advisor, a bank, or an insurance company, and has accepted fiduciary responsibility in writing.

Once appointed, a 3(38) investment manager has full fiduciary responsibility for the plan’s investment decision, subject to the plan’s documents and policies. The plan sponsor and any other plan fiduciaries no longer have fiduciary responsibility for the plan’s investment decisions.

It’s important for plan sponsors to remember they can never completely eliminate their fiduciary duties. Even with a 3(38) fiduciary in place, the plan sponsors are still responsible for monitoring the investment manager and making sure the manager is performing appropriately.

Talk to FiduciaryFirst

In effect, a 3(38) investment manager provides an extra layer of risk management for plan sponsors, particularly if they aren’t comfortable making investment decisions. When businesses move into unfamiliar territory, they often look for partners that have the expertise the business needs to pursue success. FiduciaryFirst can be the 3(38) fiduciary partner your company needs to help make your qualified plan successful. Contact us today to find our more.

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