Lately, I’ve been asked a lot about the difference between an ERISA 3(21) and a 3(38) investment fiduciary.
While I’m glad to hear more and more fiduciaries are interested in prudent investment management, I’m concerned about the basic lack of understanding of these important distinctions.
Let’s start with a basic definition.
ERISA 3(21) and 3(38) fiduciary investment advisory services defined by the Employee Retirement Income Security Act of 1974 (ERISA):
An ERISA 3(21) fiduciary investment advisor serves as an investment fiduciary by making investment recommendations to the plan sponsor. The 3(21) advisor has the liability for the quality of the investment recommendation, but does not have the responsibility, or authority, to add or remove the investment directly. The Plan Sponsor ultimately has the discretion and liability for accepting or rejecting these recommendations.
With an ERISA 3(38) investment advisor all the above is true except that the advisor has full discretion to add or remove the investments directly, without the plan sponsor’s approval. While a 3(38) is frequently referred to as an “Investment Advisor,” they in fact are an “Investment Manager.”
Choosing 3(21) or 3(38).
Both 3(21) and 3(38) advisers accept fiduciary responsibility and must follow the “prudent man” standard of care. Some plan sponsors want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plan’s investment menus. Others want to shift the investment menu construction, as well as investment selection and monitoring fiduciary responsibilities to a third party. In considering what type of assistance is desired, a plan sponsor must assess their investment knowledge and interest in delegating plan investment decision.
ERISA 3(38) fiduciaries and their 3(21) counterparts both add significant value to qualified retirement plans. Determining if this is right for you depends on how much liability you want to offload and how much control you are willing to give up.