The Retirement Plan Fiduciary: 3(21) vs. 3(38)

Continuing with the ‘Fiduciary’ theme from our last blog post, and since Plan Sponsors are increasingly looking for investment advisors who can shoulder some of the fiduciary burden related to offering employee retirement plans, I thought it would be beneficial to write about the difference between a 3(21) and 3(38) retirement plan fiduciary.

There’s definitely an uptick in having an independent entity sign off as a fiduciary along with the plan sponsor. The number of plan sponsors interested in such an advisor has increased as the number of class action lawsuits filed by plan participants against their retirement plans has risen.

In February 2008, the U.S. Supreme Court ruled in LaRue v. De Wolff, Boberg & Associates, Inc. that plan participants may take action against plan sponsors. Many lawsuits followed, which has scared many advisors away from becoming fiduciaries.

If you are a plan sponsor and a fiduciary to the plan, you have a duty to act in the best interest of your participants. You need to be a prudent expert. If you are not, you need to go out and find that expertise. In today’s environment, a 3(21) or 3(38) fiduciary is another expert that a plan sponsor can share some responsibility and liability with.

According to the Employee Retirement and Investment Security Act (ERISA), a 3(21) fiduciary serves as a ‘co-fiduciary’ to the plan. As a ‘co-fiduciary,’ a 3(21) investment advisor will provide the plan with a recommended menu of funds. This recommended lineup is then approved by the company providing the retirement plan (investment committee, retirement plan committee, plan sponsor etc.). With this arrangement, the plan sponsor has merely hired a ‘partner’ to help them carry out their fiduciary responsibilities.

ERISA 3(38) fiduciaries stand in stark contrast to their 3(21) counterparts. A 3(38) fiduciary does not provide the plan with a recommended menu of funds; it actually selects and manages the lineup of funds that are used in the plan. A 3(38) fiduciary is considered the investment manager to the plan. Therefore, the plan sponsor does not retain any fiduciary responsibilities relating to the fund lineup, giving that person relief from any related liability.

Please note, not everyone in the marketplace will serve as a fiduciary. Some only act as a broker and won’t sign on as a fiduciary. Most plan sponsors prefer a 3(21) or 3(38) fiduciary. If you are in charge of making this decision for your company’s plan, it is important to understand in what capacity your investment advisor is acting.

- Brian Valenti

Generation Capital Management (GCM) is an independent, SEC-Registered Investment Advisor located in Rochester, NY. Since 2003, we have provided value to our clients through a premium level of investment service and an unbiased, effective investment process. If you have questions or need additional information, please feel free to contact us at: (585) 232 – 8560.