Fiduciary by the Numbers: Who are 3(16), 3(21) and 3(38) Fiduciaries?

Fiduciary Numbers

It’s not uncommon for plan sponsors to seek help fulfilling their responsibilities as plan fiduciaries. Especially with complicated and crucial duties related to administrative and investment oversight, plan sponsors can easily feel out of their depth and may prefer to call upon someone with knowledge and experience with retirement plans and in the financial markets to bear much of this burden.

But ERISA rules about fiduciary duties for outside firms are complex. From a plan sponsor standpoint, it’s important to understand how much actual fiduciary support they can expect before hiring a third party to act in a fiduciary capacity.

In some cases, these firms only act in a limited fiduciary capacity or simply share fiduciary responsibility with the plan sponsor. That may be fine, but plan sponsors should know how far their fiduciary duties would go before hiring them.

Let’s go through these roles, by the numbers, to provide some guidance to plan sponsors when making these outsourcing decisions.

3(16) Fiduciaries: Plan Administrators

A 3(16) fiduciary (as defined by ERISA) acts as THE plan administrator. It can be confusing, as the plan administrator is different from a third party administrator (TPA). Responsibilities that fall under the plan administrator and can be outsourced to a 3(16) fiduciary to cover the day-to-day operations of the plan. Specific duties of the administrator are set by ERISA law and are defined in the terms of the plan document. 3(16) administration would typically include (though is not limited to) eligibility determination, distribution of summary plan description documents and other notices to participants, loan administration and distribution, and determinations of domestic relations orders (QDRO’s).

There are many responsibilities a TPA generally performs for plan sponsors without being designated as a 3(16). These include preparing the plan documents, annual testing and the completion of the 5500 forms for the plan sponsor to sign. Plan sponsors are ultimately responsible for data provided to a 3(16) fiduciary, but the very tasks performed by 3(16) administrators are the kind that involve the greatest fiduciary liability.

No specific 3(16) fiduciary duties are mentioned in the code, so it’s generally up to the plan sponsor to understand the scope of a TPA’s fiduciary responsibilities as defined in the contract. If looking to hire a 3(16) fiduciary, it’s important for plan sponsors to do that. Any duties that are not specifically given to a plan administrator would be assumed to fall under the plan sponsor’s fiduciary responsibility.

3(21) Fiduciaries: Investment Advisors

Oversight of investment management responsibilities is an important area where plan sponsors should understand who does what. When is investment advice a recommendation and when is it management? That’s the bright line between the next two types of fiduciaries: 3(21) and 3(38) investment advisors.

3(21) fiduciaries can be any firm that wishes to take on an investment advisory role with plan sponsors. They provide advice for a fee and fulfill fiduciary duties under a written contract with the plan sponsor.

But the advice provided by 3(21) fiduciaries is only in the form of recommendations to plan sponsors. It’s up to the plan sponsor to act on the recommendations. Ultimately, fiduciary responsibility for any decisions that are made—for example, which funds to include in a plan menu—fall on the plan sponsor.

3(21) fiduciaries do share fiduciary responsibility with plan sponsors, so there is some level of support. But a plan sponsor is by no means “off the hook” when working with a 3(21) fiduciary. Plan sponsors who wish to delegate more of this responsibility should consider 3(38) fiduciary services.

3(38) Fiduciaries: Investment Managers

3(38) fiduciaries take their responsibilities further than 3(21) fiduciaries by bearing the full risk for investment decisions made on behalf of clients. Unlike 3(21) fiduciaries, not anyone can be 3(38) fiduciaries—only one of three types of entities qualify: a bank, an insurance company, or a registered investment advisor (RIA).

When plan sponsors bring on a 3(38) fiduciary as an “investment manager”, they pass their fiduciary responsibility for investment decisions to the investment manager. Many plan sponsors looking to reduce their legal liability see 3(38) fiduciaries as a good option for this reason.

That doesn’t mean plan sponsors would be absolved of all fiduciary responsibility by hiring 3(38) investment managers. They are obligated to perform adequate due diligence on the manager and continue to monitor investment fees and performance to ensure participants’ best interests remain at the forefront.

Additionally, plan sponsors should maintain control over the investment policy statement, providing guidelines to the 3(38) investment manager over preferences or exclusions to consider, such as avoiding specific asset classes that are high risk or including a range of passively-managed index funds in an investment lineup.

Which Number to Choose for Appropriate Fiduciary Support?

It’s a good idea for 401(k) plan sponsors to have fiduciary support. They should know what kind of fiduciary support is available and how to choose one that makes the most sense for the plan.

Any advisor you choose to work with should accept responsibility as a fiduciary, whether it’s a 3(21) or 3(38) fiduciary. The choice comes down to preference—how much control does a plan sponsor want to retain, and how much risk would they like to delegate to a third-party fiduciary.

What’s important in this decision is knowing the level of support each type of fiduciary provides and the limits of that support. By understanding the roles different fiduciaries can fulfill, plan sponsors can make a suitable choice that’s in the interests of the plan and the business as a whole.