Most companies and organizations’ human resources departments and C-suites are seeking efficiencies and risk mitigation for their entities. For those, and a myriad of other, reasons 3(38) fiduciary discretionary investment management services are getting a closer look by plan sponsors.
In exploring these 3(38) services it is important to understand that when you hear “3(38)” or “3(21)” it is understood that these are sections of ERISA that provide definitions for certain types of fiduciaries. As a result, it is important to understand there are significant differences between an ERISA 3(21) and 3(38) advisor in terms of investment services provided to the plan.
Simply stated, the ERISA 3(21) advisor makes investment recommendations to the plan fiduciaries (committee), but the decision to implement the recommendations and attendant legal responsibility still fall on the plan fiduciaries (oftentimes an authorized committee). “You can’t blindly follow the recommendations of the 3(21) advisor. You have to make an independent decision, and though that’s usually what the advisor recommends, you’re not excused from making an informed decision just because the advisor recommended it,” says Carol Buckmann, Esq.1
Buckmann cautions, “You don’t get told about the tremendous level of risk that you take on as the plan fiduciary when you start a 401(k)” …. Carol’s insight revealed “…a litigation landscape littered with the lawsuits of plan sponsors who didn’t do their due diligence.” … (in a 3(21) environment)1
The ERISA 3(38) advisor encompasses the 3(21) responsibilities plus makes the actual investment selections and decisions based on plan needs and goals as conveyed to him by plan fiduciaries, so the 3(38) advisor is responsible for its own mistakes or mismanagement including reasonableness of performance and expenses. The plan fiduciaries are responsible for prudently selecting a good 3(38) and monitoring performance. But in terms of financial liability, if an ERISA 3(38) advisor is prudently appointed and monitored by the authorized fiduciary, the plan sponsor should not be liable under ERISA for the acts or omissions of the investment manager and will not be required to invest or otherwise manage any asset of the plan which is subject to the authority of the investment manager.2
A 3(38) Fiduciary may be a better choice for you if you want to maximize fiduciary liability protection for selection and monitoring plan investments, and/or have no internal plan fiduciary with the requisite expertise & credentialing to assume investment decisions and liabilities. Note that even a 3(38) cannot completely remove plan fiduciaries from all investment liability, as they retain the responsibility of monitoring the 3(38) advisor with regards to their suitability for the plan. However, the outsourcing of investment-related fiduciary responsibilities should also lessen the amount of time and attention that plan sponsors need spend administering their plan.
A 3(21) Fiduciary may be a better choice if you have the time, interest and investment expertise needed to monitor investment performance regularly, evaluate the 3(21)’s recommendations, and evidence that your investment decisions are in best interest of your plan participants while assuming the liability for determining reasonableness of investment costs and performance. The 3(21) advisor’s job is to identify investments that are appropriate for the purposes of the plan and make appropriate recommendations to the plan’s fiduciaries. The plan’s investment committee is responsible for determining suitability for their plan from cost/benefit, risk/reward perspectives as well as appropriateness for your participants and plan goals.
1 Carol Buckmann is a founding partner at Cohen & Buckmann PC, a boutique law firm practicing exclusively in the areas of employee benefits, executive compensation and investment adviser law. https://www.forusall.com/401k-blog/3-21-fiduciary-vs-3-38/
2 ERISA Section 405(d)(1) https://advisor.morganstanley.com/the-trc-group/documents/field/t/tr/trc-group/Understanding_3_21_v_3_38_Fiduciary.pdf
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This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. ACR# 3860268 10/21. A proud member of RPAG.