3(21) vs. 3(38) Fiduciary Advisors: Key Differences

Choosing between a 3(21) and a 3(38) fiduciary advisor can be tricky for business owners.

Each type plays a different role in managing retirement plans. This post will explain their roles, key differences, and how they impact your plan's investments and liability.

Keep reading to make an informed choice.

Understanding Fiduciary Roles

Fiduciary roles can be broken down into 3(21) and 3(38) advisors. Each type has distinct responsibilities and obligations in managing investment decisions for retirement plans.

Defining 3(21) Fiduciary Advisors

3(21) fiduciary advisors give advice on investments. They help plan sponsors pick and monitor investment options for retirement plans like 401(k)s. These advisors share their duty with the plan sponsor.

This means they suggest investments but do not make final decisions. Plan sponsors look at the advisor's suggestions before choosing what to include in the plan.

A key point about 3(21) fiduciaries is that they offer guidance while leaving room for plan sponsors to decide. They help ensure choices meet legal standards and serve best interests of participants.

Let's move on to understand 3(38) fiduciary advisors next.

Defining 3(38) Fiduciary Advisors

Moving from 3(21) fiduciary advisors, we shift focus to 3(38) investment managers. These professionals take on a higher level of responsibility. A 3(38) investment manager has full discretion to make and implement investment decisions for the plan's assets without needing approval from the plan sponsor.

This means they pick, monitor, and replace the investments according to the standards set by ERISA.

This arrangement reduces the liability of the employer or plan sponsor since a specialized entity makes critical investment choices. To serve as a 3(38), an advisor must be a registered investment adviser (RIA), bank, or insurance company that agrees to accept fiduciary responsibility under federal law.

Exploring Key Differences

• 3(21) Fiduciary Advisors have the authority to make investment decisions while 3(38) Fiduciary Advisors can be relieved of the responsibility for those decisions.

• Accountability and liability differ between 3(21) and 3(38) fiduciaries, impacting how they handle investment recommendations and potential risks.

Investment Decision-Making Authority

A 3(38) investment advisor has the power to make investment decisions without needing approval from the plan fiduciaries. They choose, manage, and monitor the plan's investments based on an investment policy statement.

This means they have a lot of control but also take on more liability if their choices do not work out.

On the other hand, a 3(21) fiduciary advisor gives advice to plan participants and fiduciaries about which investments might be good. But they cannot make those changes themselves.

The final choice stays with the company's retirement plan leaders or other plan officials. They have less authority over decisions but also face less risk if something goes wrong.

Accountability and Liability

3(38) fiduciary advisors have full responsibility and liability for investment decisions. They take on the duty of making informed investment choices, following ERISA reporting requirements, and ensuring compliance with federal or state laws regarding plan administration and disclosure obligations.

As a result, 3(38) fiduciaries are personally responsible for their advice and actions. This can provide assurance to plan sponsors as they transfer much of the potential liability associated with investment decisions to the 3(38) advisor.

In contrast, 3(21) fiduciary advisors share responsibility and liability with the plan sponsor concerning investment decision-making. While they provide valuable advice, the ultimate responsibility still rests with the plan sponsor, potentially exposing them to greater risk in case of non-compliance or litigation related to investments or administrative functions.

Considerations of Costs

Transitioning from responsibility to accountability, it's crucial to consider the costs when choosing between 3(21) and 3(38) fiduciary advisors. Under 3(38), the plan sponsor typically has reduced fiduciary responsibility compared to under 3(21).

However, companies should balance this against the potentially higher costs associated with selecting a 3(38) advisor. Understanding these cost implications is crucial in making an informed decision that aligns with the company's financial goals.

The ERISA requires disclosure of all fees surrounding retirement plans, including investment management and advisory fees. Plan sponsors should carefully evaluate not only the initial costs but also ongoing expenses related to each type of fiduciary advisor.

This includes considering factors like administrative charges, fund operating expenses, as well as any additional service provider fees for accurate assessment before making a decision in favor of either a 3(21) or a 3(38) fiduciary advisor relationship.

Evaluating Benefits of Each Fiduciary Type

Benefits of 3(21) Fiduciary Advisors

3(21) fiduciary advisors offer investment guidance and recommendations, providing support to plan sponsors in making informed decisions. They advise on fund lineup and investment options, empowering plan sponsors to maintain discretion over final selections while leveraging expert insights.

Moreover, 3(21) fiduciary advisors assist in meeting ERISA reporting requirements, ensuring careful compliance with disclosure needs and preventing conflicts of interest.

This proactive advisory approach alleviates potential investment-related liabilities for company fiduciaries, enabling them to make informed decisions supported by professional expertise.

With 3(21) fiduciary advisors leading the way, employee retirement income security is strengthened through personalized and knowledgeable investment strategies that adhere to ERISA-defined best practices, thus safeguarding long-term financial security for employees.

Looking ahead to the "Advantages of 3(38) Fiduciary Advisors," let's examine how this proactive involvement can shape a resilient retirement planning framework.

Benefits of 3(38) Fiduciary Advisors

3(38) fiduciary advisors can relieve plan sponsors from the investment decision-making process. This reduces their liabilities and accountability. The benefit of relinquishing this authority is that it significantly mitigates the risk of liability for investment decisions, making 3(38) advisors an attractive option for companies looking to lower their fiduciary responsibilities.

Moreover, 3(38) fiduciary advisors also provide a safeguard against potential conflicts of interest by taking on full discretion over the selection and monitoring of investments in retirement plans.

This clear division of duties helps ensure that investment decisions are made solely in the best interest of the plan participants, enhancing transparency and aligning with ERISA's requirements for achieving favorable outcomes for employees.

Conclusion

When deciding between 3(21) and 3(38) fiduciary advisors, it's crucial to understand the key differences. The investment decision-making authority, accountability, and liability vary significantly between the two.

Each type comes with its benefits, so it's essential to evaluate which best aligns with your needs. Ultimately, choosing the right fiduciary advisor is vital for ensuring compliance and making informed investment decisions for your financial future.

FAQs

1. What is the difference between a 3(21) and a 3(38) fiduciary advisor?

A 3(21) fiduciary advisor provides advice to plan administrators on investment decisions, while a 3(38) investment manager takes full control of the investments.

2. How does ERISA define these two types of advisors?

ERISA defines a 3(21) as someone who renders investment advice for a fee, while it defines a 3(38) as an investment manager with complete authority over plan assets.

3. Can both types of advisors help with retirement income security act (ERISA) reporting and disclosure requirements?

Yes, they can assist in fulfilling ERISA's required disclosures such as summary plan descriptions and other reporting tasks.

4. Are there differences in fiduciary liability between these two roles?

Yes, under ERISA section rules, the company's fiduciary liability is lessened when using a 3(38), because they take full responsibility for the selection and monitoring of investment funds.

5. Is there any role for third-party administrators (TPAs)?

Third-party administrators or TPAs often handle administrative functions like correct paperwork processing but do not carry fiduciary status or provide advice on investments.

6. What should I consider when choosing between these two types of advisors for my company’s employee benefit plan or our own 401(k)?

Consider your comfort level with delegating decision-making power; if you want more control pick the co-fiduciary arrangement with the Section-321 advisor; if you prefer to avoid conflicts by outsourcing fully then go for Section-338 Investment Manager.