Breaking Down 3(21) vs. 3(38) Fiduciary

While most are familiar with the term, many plan sponsors are uncertain of what it actually means to be a fiduciary. In fact, a recent JP Morgan survey stated 43% of company fiduciaries do not identify themselves as fiduciaries. This reflects the fact that many plan sponsors are uncertain about what a fiduciary exactly is.

To broadly define the term, a fiduciary is a person or organization that serves another person or person’s assets in a position of trust and responsibility. Specifically, a fiduciary owes the entity’s trust that their money will be managed safely and suitably. Money managers, financial advisors, bankers, accountants, executors, board members, and corporate offers may all be fiduciaries and have fiduciary responsibilities.

ERISA defines a fiduciary as “anyone who exercises discretionary authority or control over a plan’s management or assets, including anyone who provides investment advice to the plan”. Thus, if there is any level of discretionary responsibility over a 401(k) and 403(b) plan or oversight, it is likely that you are a fiduciary. With this said, this means that there are legal obligations to your plan participants and acting in their best interest is crucial.

Understanding Fiduciary Duties and Discrepancies Between 3(21) vs. 3(38)

In short, the overall duty of a fiduciary is to manage retirement plan investments and administer these investments prudently. This may sound simple; however, there is a lot of responsibility for these decisions, and it can become heavily burdensome. In addition, the main discrepancy between 3(21) versus 3(38) is that a 3(21) fiduciary is an investment adviser for the organization without discretionary authority. A 3(38) fiduciary, however, is an investment manager and will make actual decisions about what to include in the plan menu as well as implementing it.

How to Choose the Best Option

Carol Buckmann, ERISA Attorney outlines a check list that plan sponsors should consider when making the choice between 3(21) or 3(38). We have consolidated these measures and created a checklist for you to consider:

Consider the 3(38) if:

1. You or your committee do not have time or the resources to adequately select and monitor investment options.
2. You want the best and optimum amount of plan protection as possible. This can include cyber risks as well.
3. You are comfortable giving up day-to-day control and would rather focus on running and scaling your business.

Consider the 3(21) if:

1. You are comfortable making independent, expert decisions when it comes to managing the plan’s investments.
2. You have the time to manage the plan’s investments and feel confident about protecting them as well.
3. You are aware of the liabilities and fees that come with managing the investment line-up .

Fiduciary Considerations

Hiring a 3(21) or 3(38) fiduciary can be beneficial, effective, and can alleviate stressful responsibilities that come in play when making investment decisions. However, it is always crucial to still be able to make independent decisions while allowing your fiduciaries to make recommendations to your investments. Regardless of fiduciary responsibilities, it is crucial to consider and pay close attention to the plan and be on top of the investment decisions being made to maximize security and investment return and risk profiles, as well as fees.

PlanPILOT can advise and help you carefully consider outsourcing your investment fiduciary as well as educating you on the responsibilities. We offer un-biased advice and assistance to better deliver benefits and decisions effectively. We encourage you to contact us at (312) 973-4911 or info@planpilot.com.

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