Fiduciary Focus: ERISA 3(21) vs. 3(38)

by Jesse Taylor - September 28, 2012

Recently there have been articles written regarding the potential benefits of hiring an investment advisor who agrees to act in the capacity of an ERISA section 3(38) investment manager (or “3(38) fiduciary”) as opposed to an ERISA section 3(21) fiduciary for a qualified retirement plan. The information presented in these articles may be confusing and even sometimes misleading.

One definition of an ERISA section 3(21) fiduciary is an advisor who renders investment advice for a fee with respect to any monies, investments, or other property of a plan, or has responsibility to do so. Such an advisor serves in a co-fiduciary capacity to the plan and thus shares fiduciary responsibility and liability with other plan fiduciaries (i.e., investment committee members, board members). Hiring an ERISA section 3(21) fiduciary may help to mitigate the potential liability of the other plan co-fiduciaries, as the advisor would provide the necessary investment expertise and process to assist in the required investment decision-making process.

ERISA section 3(38) defines the term “investment manager” as a fiduciary who also is responsible for providing investment advisory services, but with the important distinction of possessing discretionary control over the investment decisions for the plan. In hiring a 3(38) fiduciary adviser plan fiduciaries (again, investment committees, board members, etc.) remove themselves from the ongoing investment decision-making process. However they cannot eliminate all of their fiduciary responsibility, as some articles would suggest. Procedural prudence remains necessary for all fiduciary decision making. This includes the process for hiring not only an ERISA section 3(21) fiduciary advisor, but potentially even more so for the process for hiring an ERISA 3(38) advisor (because the fiduciaries are turning over control of all investment decisions to the ERISA 3(38) advisor).

In brief, plan fiduciaries seeking to reduce their liability for investment decisions by hiring an ERISA 3(38) fiduciary advisor must understand that it requires giving up the control over plan investments and that some, but not all, fiduciary liability can shifted. We, at [YOUR FIRM NAME HERE], can serve as either (or even both) a 3(21) or 3(38) fiduciary advisor.


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