3(38) or 3(21), Which Is Better?


I often hear the question, “Which fiduciary support is the best, 3(21) or 3(38)?” The answer is... Neither and both. Neither is automatically superior to the other, and both can get the job done for employers who need help with selecting and monitoring their retirement plan’s investments. The best approach is the one that most closely fits the needs of your client.

Here are a few key differences between an ERISA 3(38) Investment Manager and a 3(21) Investment Advisor to help you decide which route to go:

3(38) Investment Manager

Full Discretion:  Implements initial menu and necessary changes without the need for approval from the Plan Sponsor. The Plan Sponsor always retains the ability to terminate the 3(38) fiduciary, of course.
Delegation of Liability: ERISA 3(38) specifically permits the Plan Sponsor to delegate the investment decisions and transfer the liability for selection and monitoring of investments, retaining only the responsibility to ensure that the 3(38) fiduciary investment manager is qualified and performing as required.¹
3(38) Signs Investment Paperwork:  Since the investment manager has discretionary authority, he or she takes the task out of the Plan Sponsor’s hands of coordinating investment changes and signing the change paperwork.

3(21) Investment Advisor

Provides Advice:  Makes recommendations and the Plan Sponsor makes all the investment decisions.
Shared Liability: The advisor provides recommendations while the Plan Sponsor may accept those recommendations or not. Each has fiduciary responsibility for their actions. Since the Plan Sponsor retains investment control, it also retains a greater amount of liability.
3(21) Does Not Sign Paperwork: The Plan Sponsor must sign investment change paperwork to implement the changes recommended by their 3(21) Advisor.

These features are a good starting point, but each of them can have pros and cons that go along with them. For example, some ERISA 3(38) fiduciary services choose the same investments for all clients, sight unseen, which can be frustrating for everyone if that menu doesn’t really line up well with the Plan Sponsor’s workforce demographics. It can also make it tough to properly map investments from the current investments to appropriate replacements when plan assets transfer to the new provider.

At Fidelis, we believe the best 3(38) investment managers still listen to the needs and wishes of the plans and their primary advisors, while retaining final authority, so that the menu can be customized to the needs of each separate and unique plan.

To discuss the pros and cons further or if you have other investment fiduciary related questions you can reach us at 866.338.0097.

David M. Montgomery, AIF®, CRPS®
President

 

1. IRC § 405(d)(1): If an investment manager or managers have been appointed under section 402(c)(3), then no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any assets of the plan which is subject to the management of such investment manager.

©2015 Fidelis Fiduciary Management, All Rights Reserved.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Advisors and Plan Service Providers use only — Not for use with Plan Sponsors, Participants, or the General Public. This information was developed as a general guide to educate advisors and plan service providers, but is not intended as authoritative guidance or tax or legal advice. Fidelis Fiduciary Management does not warrant and is not responsible for errors or omissions in the content of this newsletter.