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A 401(k) retirement plan fiduciary plays a critical role in ensuring the integrity and success of a company’s retirement plan. Under the Employee Retirement Income Security Act (ERISA), fiduciaries are legally obligated to act in the best interests of plan participants and beneficiaries. Federal law recognizes three types of 401(k) fiduciaries, 3(16), 3(21) and 3(38) fiduciaries. The names refer to the sections of the law describing their functions, with 3(16) fiduciaries overseeing the administration of the plan, 3(21) fiduciaries making investment recommendations and 3(38) fiduciaries managing investments. Learn what each of these fiduciaries does.
Consider talking to a financial advisor if you need help understanding your own portfolio or making a long-term investment plan.
Introduction to 401(k) Fiduciaries
All 401(k) plans have someone, either the plan sponsor or an administrator, acting as the 3(16) fiduciary. Most also have a financial professional acting as either a 3(21) or 3(38) fiduciary involved in investing the plan’s assets.
The duties of the different types of 401(k) fiduciaries are set out in the Employee Retirement Income Security Act (ERISA), a federal law enacted in 1974. Under ERISA, plan fiduciaries can be held liable for failing to fulfill their responsibilities. The law sets out reporting and disclosure requirements as well as practices for soliciting and enrolling participants and preparing an investment plan. These responsibilities are parceled out among the plan fiduciaries.
3(16) Fiduciaries
The duties of the 3(16) fiduciaries center on the administration of the plan. These functions include distributing summary plan descriptions, soliciting and enrolling members and fulfilling reporting requirements. The role of a 3(16) fiduciary is often delegated to an outside vendor called a third-party administrator hired by the plan sponsor.
If there is no third-party administrator, the role of 3(16) fiduciary defaults to the plan sponsor. When the 3(16) fiduciary is a third party, it does not fully relieve the plan sponsor of its fiduciary responsibilities. Having an outside 3(16) fiduciary will likely improve the plan’s compliance with the law. However, the sponsor is still responsible for choosing the third-party administrator and seeing that the responsibilities of the fiduciary are properly executed.
3(21) Fiduciaries
The 3(21) fiduciary is a financial advisor to the plan. In exchange for a fee, the 3(21) fiduciary gives advice and makes recommendations about how the plan’s assets are to be invested. A 3(21) fiduciary may have a different level of involvement as an advisor, ranging from making limited recommendations to being more fully involved. A 3(21) fiduciary can also help see that the plan is complying with the investment-related portions of the ERISA requirements.
As an investment professional, the 3(21) fiduciary can help ensure the selection of investments that are in the best interests of the participants. However, the 3 (21) advisor generally has limited fiduciary responsibility. In a limited role, the 3(21) fiduciary may simply present the plan sponsor or 3(16) fiduciary with a list of investment options such as mutual funds that have been selected to align with the plan’s financial objectives.
Whether using a limited or more fully involved 3(21) fiduciary, the plan sponsor or other designated investment fiduciary is still ultimately responsible for making the decisions about where and how to invest.
3(38) Fiduciaries
A 3(38) fiduciary is also an outside financial professional hired for a fee to assist with the plan. Not just any financial professional can fill the role of 3(38) fiduciary. Only banks, insurance companies and registered investment advisors can act as 3(38) fiduciaries to 401(k) plans.
However, the 3(38) fiduciary has the added authority to make investment decisions independently, rather than to simply provide advice and recommendations like a 3(21) fiduciary. That means the 3(38) fiduciaries can buy and sell mutual funds and other investments of the plan on their own authority. These fiduciaries have full fiduciary responsibility and liability to manage the plan to the participant’s best interest, similar to the 3(16) fiduciaries.
A 3(38) fiduciary is still expected to be transparent about investment decisions, including providing performance reports to the plan sponsor. But the decisions about investments ultimately rest with the 3(38) fiduciary, not the 3(16) fiduciary. This effectively reduces some of the liability on 3(16) fiduciaries. Although a 3(38) fiduciary has the authority to make investment decisions for the plan, the plan sponsor or other appointing fiduciary can still remove and replace the 3(38) fiduciary if performance is unsatisfactory.
Comparing 3(38), 3(21) and 3(16) Fiduciaries
A 401(k) plan may have multiple fiduciaries responsible for different aspects of its operation. A 3(38) fiduciary manages investments, a 3(21) fiduciary provides investment advice and a 3(16) fiduciary handles assigned administrative responsibilities.
| Fiduciary | Primary Role | Typical Authority | Plan Sponsor’s Role |
|---|---|---|---|
| 3(38) | Investment management | Discretionary investment authority | Selects and monitors the investment manager and retains other nondelegated duties |
| 3(21) | Investment advice | Typically recommends investments without discretionary authority | Makes the ultimate investment decisions |
| 3(16) | Plan administration | Performs administrative fiduciary duties assigned under the plan and service arrangement | Retains duties that have not been delegated and oversight responsibilities that still apply |
The main difference between 3(38) and 3(21) fiduciaries is who makes investment decisions. A 3(38) investment manager has discretionary authority over investments within its assigned scope, while a 3(21) fiduciary generally makes recommendations for the plan sponsor to approve. A 3(16) fiduciary handles administrative duties rather than investment selection.
An employer may use a 3(16) fiduciary for plan administration and a 3(21) advisor for investment recommendations, leaving its retirement committee responsible for investment decisions. Alternatively, it may appoint a 3(38) investment manager to make those decisions.
The arrangement depends on the plan’s needs and the responsibilities the employer wants to delegate. Regardless of the structure, the plan sponsor generally remains responsible for prudently selecting and monitoring appointed fiduciaries and carrying out duties it retains under ERISA.
Why Fiduciary Responsibilities Matter
ERISA generally requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable plan expenses. Fiduciaries must also act prudently, diversify plan investments when appropriate and follow plan documents insofar as they comply with ERISA.
Failure to meet these duties can expose fiduciaries to personal liability for losses resulting from a breach.
Employers may therefore choose to work with outside fiduciaries to obtain specialized expertise and transfer certain responsibilities. However, hiring an outside provider does not necessarily remove every fiduciary obligation from the employer.
Plan sponsors should understand which responsibilities are delegated, which are retained and how the outside provider will be monitored.
How Fiduciary Roles Can Work Together
A retirement plan does not necessarily have to choose among a 3(38), 3(21) and 3(16) fiduciary. Different providers can perform different functions for the same plan.
For example, a company might hire a 3(38) investment manager to make investment decisions while using a 3(16) fiduciary for certain administrative responsibilities. Alternatively, the employer could work with a 3(21) investment advisor for recommendations while retaining authority over investment choices.
The appropriate structure depends on the employer’s resources, expertise and desired level of involvement.
What Plan Sponsors Should Review Before Hiring a Fiduciary
Before hiring an outside fiduciary, plan sponsors can review the service agreement to identify exactly which duties the provider accepts. A provider’s marketing title alone does not determine the scope of its ERISA responsibilities. The contract, plan documents and actual authority exercised can all matter.
For a 3(38) investment manager, the sponsor can confirm that the provider meets ERISA’s requirements for an investment manager and has acknowledged fiduciary status in writing. With a 3(21) investment advisor, the sponsor can identify which investment decisions remain with the employer. For a 3(16) arrangement, the parties can specify which administrative functions the provider has authority and responsibility to perform.
Plan sponsors can also review fees, conflicts of interest, experience, regulatory history and procedures for monitoring the provider. Delegating fiduciary functions can shift responsibility for particular tasks, but employers should understand any selection, monitoring or other duties they continue to hold.
Choosing Between Fiduciary Services
Employers choosing among fiduciary services should first identify where they need help.
A business that wants to retain control of investment decisions but needs professional guidance might consider a 3(21) investment advisor. A business that wants to delegate discretionary investment management might consider a 3(38) investment manager.
Employers primarily concerned with administrative complexity may look to a 3(16) fiduciary arrangement.
Cost can also influence the decision. Service fees may vary based on plan size, the provider’s responsibilities and the level of fiduciary authority assumed.
Before hiring a provider, employers should carefully review the service agreement to determine exactly which duties the provider accepts and which remain with the plan sponsor.
Bottom Line
3(38), 3(21) and 3(16) fiduciaries serve different functions within ERISA retirement plans. A 3(38) fiduciary serves as an investment manager with discretionary authority, while a fiduciary providing investment advice under 3(21) may advise on investments without having authority to make the final investment decisions. A 3(16) fiduciary focuses on plan administration.
Employers can use more than one type of fiduciary service, and delegating duties does not necessarily eliminate all of the employer’s responsibilities. Understanding the authority granted to each provider and the duties the plan sponsor retains is an important part of managing an ERISA-covered retirement plan.
“Hiring a fiduciary doesn’t necessarily mean handing over all of your fiduciary responsibility. The type of fiduciary you hire determines which responsibilities they assume and which ones remain with the plan sponsor,” said Brandon Renfro, CFP®.
Brandon Renfro, CFP®, RICP, EA provided the quote used in this article. Please note that Brandon is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.
Tips on Retiring
- If you are acting as a plan sponsor and effectively are a 3(16) fiduciary, consider working with an experienced financial advisor to help with the investment side of the plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Will you have enough in your 401(k) to retire? One quick way to get a good read on that is to use a free 401(k) calculator.
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