3(16), 3(21) and 3(38) Fiduciaries: What’s the Difference?
If you’re an employer who offers a 401(k) plan for your employees, chances are, you’re a fiduciary to the plan. However, if you’re confused about how to properly manage the plan and fulfill your duties as a fiduciary, you’re not alone. Most plan sponsors could use some help understanding this complex role.
What does it mean to be a 401(k) plan fiduciary? In its simplest terms, it means that you are responsible for acting in the best interests of the plan’s participants. It also means you could be held liable if you fail to fulfill your fiduciary responsibilities, especially with regard to managing the plan’s investments and administration. However, most plan sponsors wear multiple hats — perhaps you’re a business owner or corporate executive with other responsibilities besides managing the company 401(k) plan. That could mean you need help fulfilling your fiduciary duties. Or perhaps you want to reduce your liability. Or both.
If so, you might consider outsourcing the plan’s administration and/or investment management to a qualified professional who can help by taking on some or most of your fiduciary duties. Typically, there are three types of “outsourced fiduciaries” for 401(k) plans: 3(16), 3(21) and 3(38). Each may assume different fiduciary duties and levels of liability. This article will discuss the differences between each type of outsourced fiduciary and explain the services they can provide.
What is a 3(16) Fiduciary?
A 3(16) fiduciary generally handles administrative functions, such as reporting and disclosure requirements. A vendor who serves as a 3(16) is responsible for ensuring that the plan is created and managed according to the criteria set forth in the Employee Retirement Income Security Act (ERISA) — the law that governs retirement plans. A 3(16) fiduciary's duties may range from processing hardship withdrawals, creating and updating summary plan descriptions, sending participant notices and disclosures, and filing the Form 5500.
If the plan has no administrator, you automatically take on this role as the plan sponsor. That means you also assume the related liability. You may choose to hire a 3(16) fiduciary to perform some, or all, of the role of the plan administrator. ERISA defines fiduciary duties for plan administrators, but it uses broad terminology. Therefore, the responsibilities of a 3(16) are not totally straightforward — their duties are often dictated by the plan document. As such, no two descriptions of a 3(16) are the same. In other words, a 3(16) fiduciary can fulfill a variety of administrative responsibilities. Less than 1% of advisers engage in 3(16) services. Note that, generally, a third-party administrator (TPA) may act as a 3(16) fiduciary, whereas an investment advisor can serve in either a 3(21) or 3(38) role.
What is a 3(21) Fiduciary?
A 3(21) fiduciary includes anyone who provides investment advice or manages plan assets for a fee. Typically, they act as “co-fiduciary,” which means they work with you and your retirement plan committee to make investment recommendations and help select the funds in the plan’s investment menu. When working with a 3(21) investment adviser, you’ll approve the investment lineup, along with any recommendations for fund changes over time. That means you’re still responsible — and assume the liability — for the final investment decisions.
A 3(21) fiduciary can add value by helping you make well-informed decisions and improving how your plan operates, inadvertently reducing your liability. They can also advise you on following a fiduciary process, such as adhering to an Investment Policy Statement (IPS). There are a few different flavors of 3(21) fiduciaries: full, specific, or limited scope. As the risks and responsibilities of the retirement plan vary, the risks and responsibilities of a 3(21) fiduciary may shift as well. Thus, it’s important for you to fully understand the type of relationship you’re entering into when you hire any third-party investment adviser.
What is a 3(38) Fiduciary?
When you hire a 3(38) fiduciary, you give the advisor full discretion and fiduciary liability over your plan’s investments. In other words, they make all of the investment decisions and take responsibility for them. A 3(38) fiduciary selects and monitors the funds, even removing managers when necessary. Unlike a 3(21), a 3(38) bears the investment risk. Therefore, this arrangement alleviates much of your liability pertaining to the plan’s investments.
In addition, the 3(38) should acknowledge their fiduciary status in writing. It is important to note that delegating the responsibility of managing the investment lineup to the 3(38) fiduciary does not fully eliminate your fiduciary responsibility. However, your liability is limited to prudently selecting and monitoring the 3(38) fiduciary and benchmarking the reasonableness of their fees.
The following is a simplified breakdown of the differences between 3(16), 3(21) and 3(38) fiduciaries:
Co-fiduciary (is liability shared?)
Yes. Plan sponsor and 3(16) are responsible for ensuring the plan is compliant under ERISA requirements.
Yes. Plan sponsor and 3(21) are responsible for the investments.
No. A 3(38) assumes all liability for the plan’s investments.
What is Plan Sponsor liable for?
Plan administration (if outside 3(16) is not included in administrative capacity).
Investment menu and performance.
Proper due diligence in selecting the 3(38) fiduciary.
What are the outsourced fiduciary’s responsibilities?
Varied. Could include reporting and disclosure requirements, summary plan descriptions, participant disclosure, and Form 5500 filings.
Recommending the investment menu. May provide some ongoing reporting around fund performance.
Selection of investment options. Ongoing monitoring and review of investment options selected.
Who can fill the role?
Plan administrator or third-party administrator (TPA) (if none, plan sponsor is automatically responsible).
Any investment adviser who offers investment advice or manages plan assets for a fee.
Bank, insurance company or registered investment advisor (RIA).
So which type of fiduciary is “right” for your plan? That depends on a variety of factors, including your plan’s size, budget, how much of a say you want to have over your plan’s investments and day-to-day operations, and how much fiduciary risk you want to take on yourself.
If you’re trying to decide between hiring a 3(21) and a 3(38) fiduciary, or if you’re looking for administrative help from a 3(16) fiduciary, let’s talk. We can help you determine which level of fiduciary support may be right for your plan.
This information was developed as a general guide to educate plan sponsors. It is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.