Quick Summary
A 3(21) advisor recommends investment changes and the plan sponsor makes the final decisions. A 3(38) investment manager has discretionary authority to select, monitor, and replace investments, and takes on responsibility for those decisions. Either way, the sponsor must still prudently select and monitor the advisor and handle plan administration. Read your advisory agreement to confirm which role your advisor actually plays.
If you have talked with retirement plan advisors, you have probably heard the terms 3(21) and 3(38). They sound like jargon, and they are, but the difference between them determines who makes investment decisions for your plan and who is responsible for those decisions.
Both numbers refer to sections of ERISA, the federal law that governs most private-sector retirement plans.
ERISA section 3(21): the co-fiduciary advisor
Section 3(21) is part of ERISA's general definition of a fiduciary. It includes anyone who provides investment advice to the plan for a fee.
A 3(21) advisor:
- Reviews the plan's investments and recommends changes
- Acknowledges in writing that it is acting as a fiduciary when giving that advice
- Leaves the final decision to the plan sponsor or investment committee
In this arrangement, you decide whether to accept each recommendation and you implement the changes, usually by instructing the recordkeeper. The advisor is responsible for the prudence of its advice. You remain responsible for the decisions you make, including the decision to follow or not follow the advice.
ERISA section 3(38): the investment manager
Section 3(38) defines an investment manager. To qualify, the manager must be a registered investment adviser, a bank, or an insurance company, and must acknowledge in writing that it is a fiduciary to the plan.
A 3(38) investment manager:
- Has discretionary authority to select, monitor, and replace the plan's investments
- Implements changes directly, without needing your approval for each one
- Takes on responsibility for those investment decisions
Under ERISA, when a plan properly appoints an investment manager, the plan's trustees generally are not liable for the investment manager's individual investment decisions. That is the key difference. With a 3(38), the investment decisions, and the responsibility for them, move to the manager.
What you are still responsible for
A 3(38) appointment does not remove all fiduciary responsibility. You remain responsible for:
- Prudently selecting the investment manager. That means evaluating qualifications, services, and fees before hiring.
- Monitoring the investment manager. You should review the manager's reports, meet periodically, and confirm the manager is following its stated process.
Neither a 3(21) nor a 3(38) arrangement covers plan administration. Duties such as determining eligibility, depositing contributions on time, following the plan document, distributing required notices, and filing Form 5500 are administrative responsibilities. Some plans hire a 3(16) plan administrator to take on part of that work, which is a separate arrangement.
You also remain responsible for making sure the fees paid to all of your plan's providers are reasonable.
A side-by-side comparison
| 3(21) co-fiduciary | 3(38) investment manager | |
|---|---|---|
| Who makes investment decisions | Plan sponsor, based on advisor recommendations | Investment manager |
| Who implements changes | Plan sponsor | Investment manager |
| Sponsor's main role | Review recommendations, decide, and document | Select and monitor the manager |
| Sponsor's time commitment | Higher | Lower |
Which one fits your plan?
A 3(21) arrangement may fit when:
- You have an investment committee with the time and interest to review recommendations
- You want to retain final say over every investment change
A 3(38) arrangement may fit when:
- You are a business owner without the time to evaluate investment decisions
- You want investment changes made promptly, without waiting for committee approval
- You want to shift responsibility for investment decisions to a professional
Some sponsors start with a 3(21) arrangement and move to a 3(38) as the business grows and the owner's time becomes more limited. Others choose a 3(38) from the start. Either path can be prudent if the decision is documented.
Pricing for each arrangement varies by provider, so compare the services and responsibilities included rather than the label alone.
Watch the fine print
Some recordkeepers and platforms offer investment menus described as "fiduciary" or "managed." Read the agreement carefully. Unless a provider acknowledges in writing that it is acting as a 3(38) investment manager with discretionary authority, the responsibility for investment decisions may still sit with you. Ask any prospective manager for a sample quarterly report so you can see what monitoring will look like in practice.
How Northshire approaches it
Northshire Consulting LLC | Registered Investment Advisory Firm serves as a 3(38) investment manager for the plans it manages, taking discretionary responsibility for the investment lineup while keeping plan sponsors informed through regular reviews and documentation.
Want to understand which fiduciary role your current advisor plays? Brian Williams, CPFA®, meets with business owners to review advisory agreements and plan responsibilities. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
Does hiring a 3(38) investment manager eliminate my liability?
Not entirely. It shifts responsibility for investment decisions to the manager, but you remain responsible for prudently selecting and monitoring the manager.
Can we switch from a 3(21) arrangement to a 3(38) arrangement?
Yes. A change typically involves a new written agreement with the advisor and appropriate documentation of the decision.
How do I know which arrangement I have now?
Review your advisory agreement. It should state whether the advisor acts as a fiduciary and, if so, under which section of ERISA.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.