Prosperity Financial Group Logo

A Quick Guide to ERISA Fiduciaries: 3(16) vs. 3(21) vs. 3(38)

Share This Post

If you’re in charge of running your company’s 401(k), you’re probably familiar with the term “Fiduciary.” You might trust your Broker, Financial Advisor, or Retirement Plan Advisor to act as a Fiduciary and have your best interests in mind. After all, your Physician and Attorney are ethically and legally required to act in your best interest. Wouldn’t it make sense that your Advisor is, too?

Not always.

The reality is that many Advisors aren’t required to put plan or participant interests first. The title of “Financial Advisor” is just a title, not an official designation. Unfortunately, hidden fees and conflicts of interests are typical in the retirement plan market. Only Fiduciary Advisors are bound by law to make decisions in your best interests and those of plan participants.

Knowing the type of Retirement Plan Advisor that you’ve hired is crucial for assessing your risks, meeting your Fiduciary standards, and providing the best experience for your plan participants. By equipping yourself with this knowledge, you can avoid becoming the target of audits and investigations, heavy penalties, and lawsuits.

That’s why we put together this guide to help you understand the ins and outs of a 401(k) Plan Fiduciary. We’ll cover the following questions as they relate to your 401(k) plan:

Let’s dive in.

What is a Fiduciary?

This is a question that many plan sponsors, or individuals who oversee company 401(k) plans, are unclear about. In fact, a recent JP Morgan survey found that 43 percent of Fiduciaries weren’t aware that they were Fiduciaries under the Employee Retirement Income Security Act (ERISA). It sounds complicated, but it essentially refers to the guidelines that spell out the obligations that you have to your 401(k) plan participants.

  • Fiduciary: a person who acts on behalf of another to manage financial assets
  • 401(k) Fiduciary: someone who is responsible for making decisions about a 401(k) plan and its assets

Why does the ERISA Fiduciary standard exist?

ERISA was enacted to protect 401(k) participants and beneficiaries. One way ERISA does this is by imposing high standards of conduct and significant duties on Fiduciaries. The Fiduciary standard protects plan participants from negligence, conflicts of interests, and more.

As a Fiduciary, you’re legally obligated to put your plan participants’ interests first when making investment decisions for them. You’re also required to act ethically and give unbiased advice about financial decisions.

Am I a Fiduciary?

Still not sure whether you’re a Fiduciary? ERISA also defines a Fiduciary as:

  • A person involved with plan administration,
  • A person with management and control over investments, or
  • A person who gives investment advice regarding plan assets.

Every plan must have at least one named Fiduciary. If no one is specified as the named Fiduciary in your plan documents, that means the business owner or the board is liable.

The plan sponsor, plan investment committee members, and plan trustees are generally Fiduciaries. In general, if you’re responsible for some level of 401(k) plan management or oversight, you’re probably a Fiduciary.

What are the Fiduciary responsibilities of a 401(k) plan administrator?

As the named Fiduciary to your 401(k) plan, you’ll be held accountable to high standards of care, skill, and prudence. You must act solely in the interest of your plan participants and beneficiaries while managing retirement plan investments and administration. The responsibility for investment decisions also falls on you.

Some of your key responsibilities include:

  • Building the plan’s fund lineup. You must ensure the plan’s fund lineup is diversified, free of poor-performing funds, and fees are reasonable.
  • Selecting the optimal QDIA. Consider plan demographics and participant data when selecting a Qualified Default Investment Alternatives (QDIA) option.
  • Keeping track of investment performance. This includes placing poor performing funds on a watch list, and removing funds that aren’t performing well.
  • Ensuring that participants are paying reasonable fees. You can do this by running regular benchmarks and RFPs.
  • Monitoring plan strategy. We’d suggest holding quarterly committee meetings to make decisions about how to reduce fees and optimize the plan’s fund lineup.
  • Administering distributions and loans. It’s your job to oversee the disbursement and repayment of the loan. When your employees reach retirement, you’ll also oversee the distribution of funds.

And you’re personally liable for a lawsuit if you aren’t fulfilling those responsibilities correctly.

What are the consequences of breaching ERISA Fiduciary duty?

If you fail up to live up to ERISA’s Fiduciary standards, you can be personally liable for losses. That means your employees can sue you for high fees or poor investment performance. Even plan officials who don’t realize their Fiduciary status run the risk of violating ERISA’s standards!

This could expose you and your firm to potentially significant liability. In fact, broken 401(k) plans are common enough that they’ve given rise to their own litigation industry.

With so many Fiduciaries unaware of their Fiduciary responsibilities or how to properly fulfill them, and the huge potential settlement payouts, it’s no wonder this type of litigation is booming!

Depending on your resources and experience, that personal liability for Fiduciary breach can be overwhelming. But there is one way to offload your Fiduciary liability: hire a Fiduciary 401(k) Advisor.

How can I minimize my Erisa Fiduciary liability?

If you don’t have the expertise, time, or attention needed to comply with ERISA’s complex requirements, your Fiduciary 401(k) Advisor can assume your Fiduciary liability and fulfill your Fiduciary duties.

The right Advisor has the extensive experience to minimize the risk of huge losses, including individual out-of-pocket penalties. You’ll be able to dodge all the headaches that come along with holding 401(k) Fiduciary responsibilities, including:

  • Lawsuits.According to a new analysis from Bloomberg Law, 401(k) fee lawsuits saw a fivefold jump from 2019 to 2020.
  • Accusations of fund mismanagement. Participants can sue employers for violating ERISA rights if, usually for high fees or poor investment options.
  • ERISA and Department of Labor (DOL) audits and investigations. These are costly, time-consuming, and generally unpleasant. Auditors are not an easy group to negotiate with to fix deficiencies.
  • Penalties for noncompliance. If your plan is audited and no one takes the time to fix it, you’ll be subject to punitive enforcement actions. In certain cases, fines and other penalties can destroy not just the plan, but the organization itself.

Chances are, you’re busy with other responsibilities besides managing the company 401(k) plan. And sometimes, not only is it smart to seek help from a qualified investment professional—it might even be required. ERISA’s Prudent Expert Standard requires you to hire experts when you’re not qualified. In short, unless there’s internal expertise at the plan sponsor level, you’re required to bring an expert onboard.

Regardless of your expertise, you can bring a Fiduciary 401(k) Advisor onboard to reduce your risk and management responsibility, earn back time to spend on more important work projects, and enjoy peace of mind.

But not all fiduciaries are created equal. There are three types of Fiduciaries you can outsource to, who will assume varying levels of Fiduciary duties and liability:

  • 3(16) Plan Administrator
  • 3(21) Investment Consultant (“do it with me”)
  • 3(38) Investment Manager (“do it for me”)

What’s the difference between a 3(16), 3(21), and 3(38) Fiduciary?

Named for the sections of ERISA which define them, 3(16,) 3(21), and 3(38) Fiduciaries provide administrative assistance and investment expertise. Though they’re all Fiduciaries, they provide different levels of protection to 401(k) plan sponsors.

3(16) Plan Administrator

A 3(16) Fiduciary takes care of administrative functions, including reporting and disclosure requirements.

Your 3(16) Fiduciary makes sure that your 401(k) is created and managed within ERISA guidelines. They’ll cover some, or all, of the ERISA reporting and disclosure duties, including:

  • Processing hardship withdrawals
  • Creating and updating summary plan descriptions
  • Sending participant notices and disclosures
  • Filing Form 5500

Unless you have a named administrator, the plan sponsor automatically assumes this role—along with all its related liability. The responsibilities of a 3(16) vary from plan to plan, and duties are dictated by the plan document.

In general, less than 1 percent of Advisors engage in 3(16) services, and a third-party administrator (TPA) may act as a 3(16) Fiduciary. An Investment Advisor will serve in either a 3(21) or 3(38) role.

3(21) Investment Consultant for ERISA Fiduciary Solutions

A 3(21) Fiduciary provides investment recommendations and can help you manage plan assets, for a fee. You can work with them in three capacities: full, specific, or limited scope.

Your 3(21) Fiduciary acts as a “co-Fiduciary,” working in conjunction with the business owner, board, or named Fiduciary to provide investment advice and help build the plan’s investment menu. As a co-Fiduciary, they’ll help you make well-informed decisions about how to improve your plan and reduce your liability.

Moreover, they can advise you on following a Fiduciary process, such as following an Investment Policy Statement (IPS).

But they don’t have any decision-making or discretionary authority. The company Fiduciary has the ultimate say in the investment lineup and any recommendations for fund changes over time. That means you still hold the responsibility—and liability—for all fees and final investment decisions.

As the risks and responsibilities of the 401(k) plan shift, your 3(21) Fiduciary’s risks and responsibilities may shift accordingly, but you and your 3(21) Fiduciary share joint liability for investment decisions. It’s important that you understand the type and nature of the relationship before working with any third-party 401(k) Advisor.

3(38) Investment Manager

A 3(38) Fiduciary has full discretion over the management of the plan and control of its assets—and bears the accompanying Fiduciary liability.

Your 3(38) Fiduciary will select and monitor the funds and assume investment risk, thus relieving much of your liability for choosing high-performing investments with fair fees. Your liability is limited to making sure your 3(38) Fiduciary is doing their job well and isn’t overcharging in fees.

Make sure your 3(38) acknowledges their Fiduciary status in writing.

How should I outsource my ERISA Fiduciary duties?

If you’re still unsure of whether a 3(21) Investment Consultant or 3(38) Investment Manager is better-suited to your 401(k) needs, refer to this table:

Header3(21) Fiduciary3(38) Fiduciary
RoleInvestment ConsultantInvestment Manager
Risk Protection

MODERATE

Makes recommendations in the best interest of participants, but the decisions and legal responsibility still fall on your plate.

HIGH*

Makes the actual investment decisions and selections, so they’re responsible for their own mistakes or mismanagement.

Investment Responsibilities
  • Act in the best interests of the plan participants.
  • Research and analyze  the best recommended plan lineup.
  • Monitor ongoing plan performance and fees, and make recommendations to the company.
  • Meet with the company co-Fiduciary (employee, owner, board, or committee) to make recommendations and discuss rationale.
  • Provide additional and optional support services for participants (e.g., financial wellness education).
  • Act in the best interests of the plan participants.
  • Research and analyze the best recommended plan lineup.
  • Monitor ongoing plan performance and fees and make changes as needed.
  • Meet with the company Fiduciary (employee, owner, board, or committee) to discuss rationale, actions, and performance.
  • Provide additional and optional support services for participants (e.g., financial wellness education).
This might be right for you if…
  • You have the time & investment expertise needed to meet regularly, monitor investment performance, listen to 3(21)’s recommendations, and come to independent decisions.
  • You prefer to be actively involved in managing the plan’s investments.
  • You’re okay with carrying personal liability for fees and investment performance.**
  • You are too busy to take on what is essentially a part-time job.
  • You don’t have someone internally with the required level of expertise.***
  • You want the maximum Fiduciary protection.
  • You want to focus your time and resources on running your business.
  • You’d rather not be responsible for selecting and monitoring investment options.
  • You’re comfortable with giving up day-to-day control.

*You’re still responsible for choosing a good 3(38) and monitoring performance. But if something goes wrong, as long as you’ve done your due diligence, you won’t be liable for the losses in the event of a lawsuit.

**You’re not excused from making an informed decision just because your 3(21) Investment Advisor recommended it. In fact, there have been several legal cases in which the defense was shot down after claiming that they were just following the recommendations of their 3(21).

***Refer to ERISA’s Prudent Expert standard. Business finance experience, like a CFO might have, is not the same as ERISA or investment management knowledge.

We Can Help

Many Fiduciaries aren’t aware of the personal liability that comes along with being a Fiduciary to your 401(k) plan. But small oversights can lead to huge financial losses. And because of ERISA’s Prudent Expert standard, it’s in your best interest to bring an expert onboard if you lack the technical knowledge and expertise to manage investments prudently.

We can help you outsource both your financial risk and your investment responsibilities, either as a 3(21) or 3(38) Fiduciary Advisor. If you’d like to speak about our 401(k) Fiduciary services, please fill out the form below. We look forward to hearing from you.

DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.

Thank you for reading our Blog Post

Related Posts

text written internal revenue service

2024 IRS Updates: 401(k), IRA, & More

The Internal Revenue Service (IRS) has announced significant updates for 2024, impacting various retirement plans, including 401(k), Individual Retirement Accounts

We're here to help

As your Fiduciary Registered Investment Advisory firm, we’re bound by law to put your interests above our own. We’re committed to maximizing your wealth within the constraints of your values and your life goals.

Our team of qualified and experienced experts is dedicated to building a positive, long-term relationship with you.
Prosperity Financial Group Logo

Allow us to help

As your Fiduciary Registered Investment Advisory firm, we’re bound by law to put your interests above our own. We’re committed to maximizing your wealth within the constraints of your values and your life goals.

Our team of qualified and experienced experts is dedicated to building a positive, long-term relationship with you.

Register for Prosperity Power Hour

Enjoy food and beverages, meet other successful professionals, improve your referral base, and win fun door prizes!

Because of the intimate nature of this event, we’re taking a very limited number of attendees per event. These seats will go fast, so grab one while you can!

Bringing a +1? Please have your guest fill out this form.