3(38) and 3(21) investment advisors

3(38) and 3(21) Fiduciary Investment Advisor Services

Byron T. Deese 401k, Business Management, Retirement Plans Leave a Comment

3(38) and 3(21) plans

If you’re a retirement plan sponsor and/or administrator, did you know that you can outsource several key responsibilities for managing your company’s benefits package for your employees? For example, you can hire a third party to provide 401(k) fiduciary services. That being said, you still maintain fiduciary duties.

A fiduciary's responsibilities

A fiduciary is someone who is required by law to put beneficiaries’ interests ahead of their own. A fiduciary’s legal role creates protection for individuals who don’t have the training or knowledge to manage their affairs or investments. The goal is to create an environment of trust and good faith, while pursuing the beneficiaries’ best interests.

Corporate executives are fiduciaries for stockholders. Real estate agents and lawyers are fiduciaries for their clients. Some financial advisors are fiduciaries, but not all.

A fiduciary's role in a retirement plan

According to the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries have several functions when it comes to retirement plans:

1. They must act solely in the interests of plan members and beneficiaries, and work to provide benefits to them.


2. They are required by ERISA to diversify the plan’s investment portfolio to reduce risk.


3. And federal law requires a plan’s fiduciary to strictly follow the terms and conditions of plan documents.


3(38) and 3(21) fiduciary investment advisors

Sections 3(38) and 3(21) of ERISA describe two different types of investment advisors for retirement plans.

1. A 3(21) advisor is a co-fiduciary who shares liabilities with the plan sponsor. They are responsible for hiring and monitoring the plan’s service providers. 3(21) advisors recommend investments, but they don’t have discretion - so they don’t engage in the actual buying and selling of securities. Nevertheless, 3(21) advisors do monitor investments and suggest replacements. 3(21) managers also help educate plan participants.


2. A 3(38) advisor is usually hired when plan sponsors prefer to have an investment advisor with discretion. 3(38) financial advisors have a larger role in overseeing the actual investment of assets. More fiduciary responsibility is transferred from the plan sponsor to the 3(38) advisor compared to the 3(21) option. This is because a 3(38) manager has full control over buying and selling securities.

The downside of the 3(38) advisor is that they may charge more for their service. This cost could be 10-15% higher than for 3(21) services, although pricing does vary from advisor to advisor.


An investment advisor can help mitigate risk

Whether you choose to bring a 3(38) or 3(21) financial advisor on board, your company will see several benefits. You will have a professional money manager who can provide assistance and recommendations (3(21) advisors) or actual investment decisions (3(38) advisors). The presence of a fiduciary in your company’s retirement plan also shifts some legal responsibilities from the company to the professional money manager - giving you the ability to focus on other more important areas of your operations.

Legal responsibilities for plan sponsors

Whether you as a plan sponsor choose a 3(38) or 3(21) advisor, you will still carry some important duties (including some fiduciary responsibilities). For example, hiring an investment advisor to perform fiduciary tasks is itself a fiduciary function that requires documented due diligence. After you hire a financial advisor for your company’s plan, you must monitor them to check that they are performing competently. 

For any type of retirement plan, the sponsor must know the details of the plan’s document. These features include vesting policies, which employees are eligible for participation, and how contributions are made.

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About The Author
Byron T. Deese

Byron T. Deese

Retirement Consultant Learn More>>

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