ERISA 3(38) Fiduciary Services

Historical insight — Originally published February 10, 2022. Preserved as historical content; information may have changed.

Most companies and organizations’ human resources departments and C-suites are seeking efficiencies and risk mitigation for their entities. For those, and a myriad of other, reasons 3(38) fiduciary discretionary investment management services are getting a closer look by plan sponsors.

In exploring these 3(38) services it is important to understand that when you hear “3(38)” or “3(21)” it is understood that these are sections of ERISA that provide definitions for certain types of fiduciaries. As a result, it is important to understand there are significant differences between an ERISA 3(21) and 3(38) advisor in terms of investment services provided to the plan.

An ERISA section 3(21) investment adviser may make recommendations, but plan fiduciaries that retain decision-making authority remain responsible for prudently evaluating and implementing those recommendations.

An ERISA section 3(38) investment manager has discretionary authority to manage plan assets and must acknowledge fiduciary status in writing. The appointing fiduciary must prudently select the manager and monitor the appointment at reasonable intervals. If those duties are satisfied, the appointing fiduciary is generally not liable for the manager’s acts or omissions, except for potential co-fiduciary liability under ERISA section 405(a).

A 3(38) Fiduciary may be a better choice for you if you want to maximize fiduciary liability protection for selection and monitoring plan investments, and/or have no internal plan fiduciary with the requisite expertise & credentialing to assume investment decisions and liabilities. Note that even a 3(38) cannot completely remove plan fiduciaries from all investment liability, as they retain the responsibility of monitoring the 3(38) advisor with regards to their suitability for the plan. However, the outsourcing of investment-related fiduciary responsibilities should also lessen the amount of time and attention that plan sponsors need spend administering their plan.

A 3(21) Fiduciary may be a better choice if you have the time, interest and investment expertise needed to monitor investment performance regularly, evaluate the 3(21)’s recommendations, and evidence that your investment decisions are in best interest of your plan participants while assuming the liability for determining reasonableness of investment costs and performance. The 3(21) advisor’s job is to identify investments that are appropriate for the purposes of the plan and make appropriate recommendations to the plan’s fiduciaries. The plan’s investment committee is responsible for determining suitability for their plan from cost/benefit, risk/reward perspectives as well as appropriateness for your participants and plan goals.

Newly available pooled employer plans (you may have heard them referred to as PEPs) often incorporate a 3(38) investment advisor and other elements/entities meant to help plan sponsors offload even greater fiduciary responsibilities, potentially lower costs and streamline administration. If you are interested in learning more, ask your NFP/RPAG advisor about either 3(38) services or PEPs as an alternative.