ERISA 3(21) vs 3(38) Fiduciary: Understanding the Key Differences

In the retirement plan industry, the term “fiduciary” is used frequently but often misunderstood. Understanding the distinctions between the various types of ERISA fiduciaries is essential for both plan sponsors and service providers to properly allocate responsibilities and mitigate risk.

ERISA § 3(21) Fiduciary Advisor

A 3(21) fiduciary advisor provides investment advice to plan fiduciaries but does not have discretionary authority over plan assets. The key characteristics include:

• Provides recommendations but final decisions rest with the plan sponsor
• Shares fiduciary responsibility with the plan sponsor
• The plan sponsor retains ultimate liability for investment decisions
• Must act prudently and solely in the interest of participants

ERISA § 3(38) Investment Manager

A 3(38) investment manager has discretionary authority to manage plan assets. The distinguishing features include:

• Has full discretionary control over investment decisions
• Assumes fiduciary liability for investment decisions
• Must be a registered investment adviser, bank, or insurance company
• Must acknowledge fiduciary status in writing

Key Differences

The primary distinction lies in who makes the final investment decision and who bears the liability:

1. Decision Authority: A 3(21) advisor recommends; a 3(38) manager decides
2. Liability: With a 3(21), liability is shared; with a 3(38), investment liability transfers to the manager
3. Documentation: A 3(38) must acknowledge their status in writing; a 3(21) may become a fiduciary by function
4. Qualifications: A 3(38) must meet specific regulatory requirements

Plan Sponsor Considerations

When selecting an investment fiduciary, plan sponsors should consider:

• The level of investment expertise available internally
• The desire to delegate investment decisions versus maintain control
• Risk tolerance and liability concerns
• Budget for fiduciary services

Conclusion

Understanding whether you need a 3(21) advisor or a 3(38) investment manager depends on your plan’s needs, your internal expertise, and your risk management strategy. Both provide valuable services, but they serve different functions and carry different liability implications. Plan sponsors should carefully evaluate their needs before engaging either type of fiduciary.