Women having a meetingLike so many other facets of retirement plan management, the role of plan advisors who help you with plan investments is governed by ERISA. And it may seem that many plan sponsors speak in ERISA code sections. For plan sponsors, the question is: Do you need a 3(38) fiduciary, or is a 3(21)ii fiduciary more fitting?

Why it Matters

The question of fiduciary status has become more urgent for many plan sponsors in recent years in the wake of a wave of fiduciary breach allegations. Many complaints involve high asset management fees on plan funds and poorly performing investments. Class action lawsuits against large plans have wound their way through the courts, with the U.S. Supreme Court weighing in. The litigation has generally involved large plans because litigation is costly, and the payday for plaintiffs’ attorneys who prevail against small plans may be too modest to attract much interest.

This doesn’t mean small plan sponsors don’t need to worry. As a plan sponsor, you’re always on the hook for the process by which you selected and monitored a fiduciary’s performance. Thus, small plan sponsors need to understand the role of external fiduciaries not just from a liability reduction perspective, but to safeguard the interests of plan participants for its own sake. Remember, you can’t evade responsibility altogether just by engaging a fiduciary.

Until relatively recently, small plans’ investments were typically handled by investment brokers and advisors who didn’t assume any fiduciary responsibility. But the landscape has evolved, and many brokers and advisors now offer to serve as what are known as ERISA 3(21)ii or 3(38) fiduciaries. Meanwhile, some seasoned retirement plan service providers that have always served in those roles worry that some former investment brokers are using this fiduciary status largely as a marketing tactic.

Who is Who

In a nutshell, the two fiduciary categories describe not just the degree of fiduciary liability assumed by a firm, but the nature of the service it provides to plan sponsors. Plan advisor fiduciaries are either of the following:

3(21)ii fiduciaries. These fiduciaries provide advice and recommendations on plan investments, and perhaps other plan design, management, and strategy matters. But you’re left to decide what to do with that input and assume fiduciary responsibility for your decisions. A 3(21)ii fiduciary maintains liability for the basic prudence of its recommendations.

3(38) fiduciaries. These fiduciaries are given discretionary authority to make decisions about plan investments, such as to hire and fire asset managers that operate the funds in your plan’s investment lineup. A 3(38) fiduciary assumes liability for those choices and, as such, doesn’t require the approval of the plan sponsor for its investment decisions.

The same plan services company could give you the choice of having it operate as a 3(21)ii fiduciary, or a 3(38) one. When a plan services company works for you as a 3(38) fiduciary, it’s doing a little more work, and therefore might charge a bit more (10% to 15%) than it would for 3(21)ii services. But, the advice process should really be the same. You don’t want to hire a fiduciary that takes a different approach based on whether it’s a 3(38) fiduciary (risk on fiduciary) or a 3(21)ii fiduciary (risk on you).

Remember, ultimately, the plan sponsor is liable for ensuring that the 3(21)ii or the 3(38) advisor is performing the services agreed to and adhering to prudent person rules. When acting as a fiduciary, regardless of which role the advisor takes, the advisor must provide the plan sponsor a statement, in writing, that he or she is acting in such capacity.

What’s Best For You

Check carefully under the hood of any plan services company you’re considering engaging. Look at its history, service capacity and all other selection criteria you normally apply to a crucial plan vendor. Don’t be sidetracked by focusing too much attention on fiduciary categories.


Headshot of Jenise Gaskin.

Related Insights