3(21) vs 3(38) Fiduciary Guide: Selecting the Right Strategy for Your Corporate 401(k)

Managing a corporate retirement plan involves balancing employee satisfaction with regulatory obligations, and selecting the right 3(21) vs 3(38) fiduciary structure is a critical first step. For business owners, CFOs, and HR directors, setting up a 401(k) is only the first step. The more critical challenge lies in managing the strict legal liabilities that come with it.

Under the Employee Retirement Income Security Act (ERISA), plan sponsors are held to a rigorous standard of fiduciary duty. Plan fiduciaries, which may include corporate officers who serve on an investment committee, can be held personally liable if they fail to follow a prudent process for selecting and monitoring the plan’s investments and fees. 

To help manage this fiduciary liability, plan sponsors typically choose between two primary operational frameworks. Understanding the difference between 3(21) vs 3(38) fiduciary strategies is essential for protecting your business and optimizing your benefits package.

What is an ERISA 3(21) Fiduciary?

An ERISA 3(21) fiduciary acts as a co-fiduciary investment advisor. When you hire a 3(21) advisor, you are retaining an expert to guide your investment committee, but you are not handing over the keys.

How the Operational Mechanics Work

The advisor conducts independent research, monitors the fund lineup, and recommends changes to the 401(k) plan. However, the advisor cannot execute these changes autonomously. Every recommendation requires the express approval of your internal corporate investment committee.

Risk Allocation

Under a 3(21) framework, you engage in co-fiduciary risk sharing. The advisor shares the fiduciary responsibility for the advice it provides, but your corporate officers still retain the ultimate liability for the decisions executed. If the committee approves a poor fund recommendation, the company remains legally responsible.

What is an ERISA 3(38) Fiduciary?

An ERISA 3(38) fiduciary acts as an investment manager. By electing this strategy, a business owner delegates discretionary investment authority to a qualified investment manager, typically a registered investment adviser (RIA), though ERISA also permits banks and insurance companies to serve in this role

How the Operational Mechanics Work

The 3(38) investment manager takes discretionary control over the plan’s assets. They select, monitor, and replace the investment options within the 401(k) lineup without needing prior approval from your HR director or CFO. They handle all adjustments autonomously based on the agreed-upon Investment Policy Statement (IPS).

Risk Allocation

This strategy may reduce your company’s investment-related fiduciary exposure. Under ERISA Section 405(d)(1), the 3(38) manager assumes the for the selection and ongoing management of the fund lineup, and the plan sponsor is generally not liable for the individual investment decisions the manager makes. No arrangement eliminates the fiduciary responsibility entirely. Your company retains an ongoing duty to prudently select and monitor the 3(38) manager, along with other plan-level responsibilities such as overseeing plan fees, service providers, and administration.

Key Differences in Fiduciary Solutions

To choose the right approach for your corporate retirement plan, it helps to compare how these two corporate retirement solutions allocate daily operations and legal exposure.

Discretionary Authority and Decision Making

• The 3(21) Approach: Offers no discretionary authority. The advisor only provides recommendations, leaving the final decision making up to your internal corporate committee.
• The 3(38) Approach: Grants full discretionary authority. The external investment manager executes fund updates autonomously.

Liability and Workload Allocation

• The 3(21) Approach: Investment liability is shared, but the final responsibility sits with your company. This model requires a higher internal workload, including regular committee reviews and formal corporate sign-offs.
• The 3(38) Approach: Fiduciary responsibility for investment decisions is assumed by the external manager, while your company retains the duty to prudently select and monitor that manager. This generally reduces internal workload, operating as a delegate-and-monitor mode for your team.

How to Select the Right Fiduciary Strategy for Your Business

There is no one-size-fits-all model for corporate retirement planning. The ideal selection depends on your internal capabilities, your available time, and your comfort level with regulatory risk.

When to Choose a 3(21) Strategy

A 3(21) strategy makes sense if your CFO or HR director enjoys a hands-on approach to corporate retirement planning. It is ideal for organizations that want to maintain a high degree of input over the corporate retirement solutions offered to employees and possess the internal resources to hold regular, compliant investment committee meetings.

When to Choose a 3(38) Strategy

A 3(38) strategy is highly efficient for fast-growing companies and lean executive teams. If your leadership team prefers to focus on core operations rather than evaluating mutual fund share classes, delegating investment authority may reduce investment related legal exposure while freeing up critical internal bandwidth.

Strengthen Your Corporate Retirement Governance

Fiduciary liability is an operational reality for any company sponsoring a 401(k) plan. Evaluating your current governance structure is a vital step in maintaining plan compliance and helping your executive team manage fiduciary risk.

Discover how a robust fiduciary framework can streamline your benefits operations and help your company reduce unnecessary risk.

[Contact the Calado Capital team today] to review your plan design and establish fiduciary strategy tailored to your corporate goals.

Disclaimer

This material is provided for informational purposes only and does not constitute legal, tax, investment, or fiduciary advice. Advisory services are offered through Calado Capital, a registered investment adviser. Registration does not imply a certain level of skill or training. All investments involve risk, including possible loss of principal. Diversification and asset allocation do not ensure a profit or protect against loss. Past performance is not indicative of future results.