Understanding 3 21 and 3 38 Fiduciary Services

3(21) and 3(38) Fiduciary Services

Plan sponsors are required by ERISA to provide an investment lineup for participants that has been prudently selected and monitored to minimize and control risk. To ease this burden, a retirement plan advisor may act as an ERISA 3(21) investment fiduciary with regards to the selection, monitoring and replacement of plan investments or as an ERISA 3(38) fiduciary with full discretion regarding the selection, monitoring and replacement of plan investments.

A retirement plan advisor can serve in either a 3(21) or 3(38) fiduciary capacity, and in some cases, both capacities. The needs and desires of the plan sponsor typically dictate the specific arrangement, which is predicated upon the subject of risk mitigation versus risk avoidance. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plans' investment menus. Others want to shift responsibilities to a third party due to their lack of expertise, and concern regarding liability exposure.

Differences

Any individual is a fiduciary under Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or she renders investment advice for a fee (or has any authority or responsibility to do so); or if he or she has any discretionary responsibility in the administration of the retirement plan.

Section 3(38) defines "investment manager" as a fiduciary due to their responsibility to manage the plan's assets. ERISA provides that a plan sponsor can delegate the responsibility of selecting, monitoring and replacing investments to a 3(38) investment manager/fiduciary. A 3(38) fiduciary may only be a bank, an insurance company, or a registered investment advisor (RIA) subject to the Investment Advisers Act of 1940.

Similarities

Anyone can call himself or herself a fiduciary, but a fiduciary is determined not only by title, but by actions, as well. Both 3(21) and 3(38) advisors accept fiduciary responsibility and adhere to ERISA §404(a)'s duty to serve solely in the interest of plan participants. In addition, both have to meet the "prudent person" standard of care. Plan sponsors retain the responsibility to select and monitor the advisor, regardless of their advisor's fiduciary status. Plan sponsors should consider the advisor's experience, skill, and level of expertise.

Working with a retirement plan advisor as your 3(21) or 3(38) fiduciary has great potential to limit your exposure to fiduciary liability, while reducing the time and expertise required to perform the plan's ongoing investment monitoring and selection duties. Most of the responsibility for (and virtually all responsibility in the case of 3(38) engagement) investment-related decisions is shifted to the advisor, giving the plan sponsor greater confidence and time to focus on other aspects of its business.

This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any regulation, company, industry or security mentioned. The information provided while not guaranteed to accuracy or completeness has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. FSC.2024.58

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This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an "as is" basis, without warranty of any kind. The Baldwin Insurance Group Holdings, LLC ("The Baldwin Group"), its affiliates, and subsidiaries do not guarantee that this information is, or can be relied on for, compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability. This publication is not intended to be legal, underwriting, or any other type of professional advice. The Baldwin Group does not guarantee any particular outcome and makes no commitment to update any information herein or remove any items that are no longer accurate or complete. Furthermore, The Baldwin Group does not assume any liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Persons requiring advice should always consult an independent adviser.

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