which fiduciary

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Do you know the difference between 3(21) and 3(38) ERISA fiduciaries – and which fiduciary is the right one to hire? Employer retirement plan sponsors really need to know the roles these advisers play so they can choose which fiduciary to work with. Unfortunately, most individuals have no idea what the difference is between the two.

There are distinct advantages for 401k and defined benefit (DB) pension plan sponsors in working with a 3(21) vs. 3(38) adviser. Outlined below are the differences and my thoughts on which fiduciary adviser each type of plan sponsor should hire.

3(21) vs. 3(38) differences

The basic difference between a 3(21) vs. 3(38) fiduciary is that in a 3(21) arrangement the employer shares fiduciary responsibility for investment decisions with the adviser and in a 3(38) arrangement the employer has no fiduciary responsibility for investment decisions. However, the employer does retain the fiduciary responsibility to review the 3(38) fiduciary. 

It is important to note that a 3(38) adviser is not obligated to share investment decisions with the employer plan sponsor for approval or review since the employer has no fiduciary responsibility. A 3(38) adviser has discretion, authority and control over all investment decisions and is in fact the investment manager.

A 3(21) adviser makes recommendations that the employer may either ignore or follow.

For your DB plan, it’s probably best to hire a 3(38)

There is no question that a 3(38) arrangement works better with DB plans because there is no requirement to notify plan participants of a change in investments and the adviser can act quickly to take advantage of market moves when buying or selling investments.

DB plans are not employee directed, like 401k plans. Defined benefit plan participants are never aware of investment changes and, as a result, a DB plan sponsor will not receive questions from plan participants about an investment change.

A 3(38) adviser in a DB plan can act with autonomy and independence in making changes to plan investments since the adviser need not be sensitive to employer or plan participant concerns. Keep in mind that a 3(38) adviser must still follow the Investment Policy Statement (IPS) for the plan.

For your 401k, probably best to hire a 3(21)

Conversely, in a 401k plan, moving quickly to take advantage of market fluctuations is impossible because it is necessary to communicate a change in the investment lineup to participants no less than 30 days and no more than 90 days prior to the change.

Different from an investment adviser working with a DB plan, a 401k plan adviser needs to be sensitive to the needs of plan participants regarding the understandability of investment options and their ease of use.

It is not advantageous for 401k plan sponsors to offer participants a lineup filled with funds they can’t understand or are only good investments in certain economic situations (like gold funds). It is much better for 401k plan sponsors to maintain a lineup that consists of less volatile funds that have reliable and predictable returns.

Why? Because plan sponsors will receive questions (and complaints) from participants about the fund lineup if it is difficult to use and understand. And, of course, participants who don’t understand how to use investment options are more likely to misuse them. Also, participants place less value on a 401k plan that has investments which are hard to understand and use.

Which Fiduciary? Final assessments

It makes sense for 401k plan sponsors to have a good understanding of the investments used in their 401k plan. They are on the firing line with employees who may question lineup changes and proper fund usage. Therefore, these plan sponsors are probably best served by working with a 3(21) adviser who will outline the logic of offering a certain investment and information on how to explain it to participants.

Defined benefit plan sponsors are much better served by using 3(38) advisers. It is not necessary for DB plan participants to understand the logic or proper use of any investment in a DB plan. Nor is it ever likely a plan sponsor will have to justify the use of a particular investment option to participants.


About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.