3(38) or 3(21): Which Fiduciary Service is Right for You?

Looking to reduce your fiduciary risk as a plan sponsor? A little outside help can yield big reductions in risk, provide the best for the people on your company’s payroll, and help you feel good about your qualified retirement plan. As the plan sponsor, the company takes on substantial legal and financial liabilities. If you’re listed as the plan administrator, some of those liabilities accrue to you as well. Best practices suggest that any plan sponsor who doesn’t possess the technical knowledge and experience to manage investments consider hiring an advisor – and your choice of advisor can significantly lower your fiduciary risk.

Why hire a fiduciary?

Hiring an outside fiduciary can reduce some or most of that liability by putting the plan in the hands of a professional that affirmatively accepts fiduciary responsibility in section 3(21) and 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). These 3(21) and 3(38) fiduciaries are not stockbrokers; instead of taking commissions on investments purchased for your plan, they’re compensated by a stated fee. This helps reduce potential conflicts of interest in constructing and managing your plan’s investments.

What’s the difference between a 3(38) Fiduciary and a 3(21) Fiduciary?

There are two types of fiduciaries recognized under ERISA standards. A 3(21) fiduciary advises and makes recommendations, but the plan sponsor still has ultimate responsibility for the legal operation of the plan and making plan-level investment choices. A 3(38) fiduciary takes over management of plan investments, makes investment choices, executes investment changes and monitors their performance. The 3(38) advisor is solely authorized to make (and is responsible for) those decisions. Because they have this responsibility, they are able to act more quickly to make changes to the plan, since such decisions need not go through the plan sponsor’s retirement committee for approval.

Hiring a 3(21) fiduciary reduces some of the labor of plan management, relieves part of the investment fiduciary responsibility, and provides the plan sponsor a professional opinion in decision-making. A 3(38) fiduciary relieves the vast majority of the labor and almost all of the responsibilities. In short, whereas a 3(21) fiduciary advises and assists; a 3(38) fiduciary can function in a broader role for plan sponsors.

Remember – even if you hire a fiduciary, you’re still involved.

With a 3(38) fiduciary, the plan sponsor is still required to provide oversight of the fiduciary. Also, hiring a 3(38) fiduciary doesn’t relieve the plan sponsor from liability for poor investment decisions made by participants. However, ERISA Section 404(c) does create a “safe harbor” for plan sponsors if they meet specific requirements that include stipulations regarding investment selection, plan administration and certain disclosures.

What about Full-Service Fiduciaries?

Firms that offer both 3(21) and 3(38) fiduciary services may also provide professional investment advice through staff or partnerships along with educational services to help meet the section 404(c) safe harbor standards. With the help of these outside professionals, you can lower your fiduciary risk and do right by your employees, all while addressing applicable regulations.

For more information about hiring a fiduciary, or questions regarding 3(21) or 3(38) fiduciaries, reach out to your plan advisor.

The “Retirement Report” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.

(c) 2019. Retirement Plan Advisory Group

Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, LLC, an SEC Registered Investment Advisor.

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