What are 3(16), 3(21), and 3(38) Fiduciaries?

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What are 3(16), 3(21), and 3(38) Fiduciaries?

A fiduciary is a person or organization that owes to another the duties of good faith and trust. A person in this role is bound ethically to act in the other’s best interest. Plan sponsors of retirement plans can pass on certain fiduciary responsibilities to service providers. This can be done as 3(16), 3(21), or 3(38) fiduciaries. Because it is one of the highest legal duties of one person to another, it is incredibly important for a Plan Sponsor to know and understand the difference when hiring a fiduciary.

3(16), 3(21), and 3(38) all refer to sections of the Employee Retirement Income Security Act (ERISA). ERISA is the law that describes the rules and regulations that come with the fiduciary title. Both Plan Sponsors and hired advisers are impacted by this law. The fiduciary is, in many cases, willing to be held accountable with the plan sponsor if litigation occurs, but they are generally not relieving the sponsor of any potential liability. To understand the difference between each fiduciary designation, let’s consider them one by one.

3(16) Fiduciaries

ERISA Section 3(16) fiduciaries act as the plan administrator and are responsible for the day-to-day operations of the plan. The fiduciary duties for the Plan Administrator are laid out and defined by ERISA and the plan document. The terminology here is broad and not 100% straightforward, so it would be prudent to take a thorough look at the documentation when seeking to hire a 3(16) fiduciary. Because the law is so broad, no two 3(16) descriptions are the same. The fiduciary is at the mercy of the plan document and the terms of the service contract.

This section of the law does not refer to traditional Third Party Advisers providing non-fiduciary services. A TPA has some of the administrative duties, but the Plan Sponsor still has discretionary control. An independent 3(16) fiduciary has both the duties and discretionary control delegated to them from the Plan Sponsor. Many times a Plan Sponsor will hire a 3(16) fiduciary to serve in the role of adviser so that they do not have to. A service provider offering to be a 3(16) fiduciary states that they will perform some, or all, of the role of the Plan Administrator, depending on the desire of the Plan Sponsor.

Every plan must have a Plan Administrator, therefore if an outside 3(16) fiduciary is not included in the administration of the plan, the Plan Sponsor automatically assumes the responsibility and potential liability of this role. Whoever serves in this capacity is responsible for ensuring that the plan is created and managed according to ERISA requirements. They potentially handle reporting and disclosure requirements, summary plan descriptions, participant disclosure, and Form 5500 filing. According to 401(k)specialistmag.com, less than 1% of advisers engage in 3(16) services.

3(21) Fiduciaries 

A 3(21) Fiduciary is any investment adviser who offers investment advice, or manages plan assets, for a fee. Including a 3(21) in a company’s retirement plan operations does not necessarily reduce liability for the plan sponsor. The fiduciary is intended to help the plan sponsor make well0informed decisions and improve their running of the plan, therefore inadvertently reducing liability.

Similar to the 3(16) designation, there is an amount of discretion in being called a 3(21) fiduciary. One can be a full, specific, or limited scope fiduciary under this delegation. As the risks and responsibilities of the retirement plan vary, so does the risk and responsibilities of someone acting in this capacity. The 3(21) adviser provides counsel and advice, but does not have discretion to make the decisions himself. The responsibility for plan decisions still lies with the plan sponsor.

3(38) Fiduciaries

3(38) fiduciaries also qualifies under 3(21)(A)(I). The difference between this designation and the others is that a 3(38) does have discretionary control over the plan’s assets. When given this designation, the investment manager does not need the plan sponsor’s permission to make changes to the retirement plan. A 3(38) manager has a fiduciary duty to prudently manage the plan’s assets. This includes selecting, monitoring, and replacing investments for the plan.

A service provider who acts as a 3(38) fiduciary is essentially offering to replace the employer and employees in the decision-making process of selecting and monitoring plan investments. Depending on the level of service, a 3(38) can alleviate some, or all, of the responsibility and potential liability for plan investment decisions.

The 3(38) section of ERISA states three important rules for this type of adviser. It lists the requirements for who can qualify, requires written confirmation that the investment manager understands their fiduciary delegation, and states that the named fiduciary is the only one responsible for the selection, monitoring, and replacement of the plan’s investment options.

Only a bank, insurance company, or Registered Investment Adviser (RIA) can be named as a 3(38) fiduciary. This should not be confused with a plan adviser. Investment managers, as defined by ERISA, have legally defined discretion. If a Plan Sponsor hires a 3(38) fiduciary, they are giving up the discretionary authority to accept or reject the advice provided.

Conclusion

For companies that offer a 401(k) plan, hiring a Registered Investment Adviser may be the key to making wise and well-informed decisions. Plan sponsors must be careful and should fully understand the liability and discretionary capabilities of the adviser they decide to hire. Together, an RIA and a plan sponsor can make a strong team that always acts with the best interest of the plan participants in mind.

 

Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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