3(21) Or 3(38) Fiduciaries – What’s In A Number?

I recently had the opportunity to assist a client in the search for a new investment consultant for their Defined Benefit Pension and 401(k) Profit Sharing Plans. Part of the discussion with our client was whether they wanted to partner with a 3(21) Investment Advisor or a 3(38) Investment Manager.

We should begin by defining each term:

Investment Advisor – ERISA 3(21) Fiduciary       

According to ERISA 3(21), an investment advisor does not have discretion over plan assets directly, but may exercise a certain level of influence and must meet a fiduciary standard-of-care.  Investment advisors provide investment guidance and recommendations to plan sponsors who may choose to accept or reject it.  The plan sponsor retains the responsibility to appoint and monitor the investment advisor and ultimately makes the investment decisions.

Investment Manager – ERISA 3(38) Fiduciary

According to ERISA section 3(38), an investment manager has discretionary control over the investment decisions of the plan.  For example, a 3(38) fiduciary will monitor and replace investment managers as it deems necessary and appropriate in its sole discretion.  The plan sponsor retains the responsibility to appoint and monitor the 3(38) fiduciary, but does not ultimately make the investment decisions.

A 3(38) investment manager may be a good option for plan sponsors concerned about reducing corporate and personal fiduciary risk.  Plan sponsors retain responsibility for hiring and monitoring the 3(38) fiduciary, as they would with a 3(21) investment advisor; however, they are protected from the fiduciary accountability associated with the investment decisions made by the 3(38) fiduciary.

Over the past two decades, many plan sponsors have shifted from Defined Benefit (DB) plans to Defined Contribution (DC) plans to reduce liability for investment outcomes in preparing participants for retirement. There has been a significant increase, however, in claims against plan fiduciaries.  A recent case against ABB, Inc. resulted in a $37 Million judgment against plan fiduciaries.  Large legal settlements of fiduciary cases are a reminder that DC plan providers can be held responsible for breaches in their fiduciary duties and highlights the importance of following a prudent process when changing plan funds.

Importance Of Evaluating

In today’s complex investment environment, it’s important that DC plan sponsors evaluate their current investment model to make sure they are meeting the ERISA standard-of-care.  Important differences between a 3(21) and a 3(38) fiduciary partner require plan sponsors to choose the one that can best mitigate fiduciary risk to the organization and themselves, while improving the overall solution for plan participants at the same time.

For additional information, please contact BPAS Fiduciary Services.