Distinction of the Section 3(38) Investment Fiduciary

Megan Nichols

Retirement plan sponsors should carefully consider their own fiduciary duties as well as the responsibilities of third-party advisors hired to help manage plan assets.

The Employee Retirement Income Security Act of 19974 (ERISA) sets out comprehensive standards of conduct for those who manage an employee benefit plan. Depending on their authority and responsibilities, many of these individuals will attain the status of an ERISA fiduciary. Fiduciaries are responsible to run the plan solely in the best interest of participants and beneficiaries and must act prudently, including properly diversifying plan assets and avoiding excessive costs. Fiduciaries who do not follow the principles of conduct set out by ERISA may be held personally liable.

  • Plan trustees, administrators, and investment committee members are all considered fiduciaries.
  • Fiduciaries also include anyone who provides investment advice to a plan for compensation or who exercises discretionary authority over plan assets.

Investment professionals hired to assist the plan can have different levels of responsibility and offer different levels of protection, as described below.

ERISA Section 3(21) Fiduciaries

Section 3(21) fiduciaries include individuals with any authority over the plan’s assets and those who render investment advice for a fee. There are various categories of section 3(21) fiduciaries (limited scope, specific scope, and full scope), but it is important to note that entities are responsible for actions solely to the extent of the control they have and exercise over the plan. While the section 3(21) fiduciary may share fiduciary status relating to its investment Advice (co-fiduciary status), the plan sponsor, through its board of directors and those to whom it delegates, retains ultimate decision-making authority (and thus liability) over these functions.        

ERISA Section 3(38) Fiduciaries

Section 3(38) fiduciaries have additional qualifications over that of section 3(21) fiduciaries and are delegated discretionary authority over the investment of all or a portion of the plan’s assets. A section 3(38) fiduciary has the critical role of making final investment selections as well as monitoring and terminating investment choices for the plan, effectively removing this responsibility from the plan sponsor. A section 3(38) fiduciary is a named fiduciary of the plan and must be either an investment advisor registered under the Investment Advisors Act of 1940, a bank, trust company, or an insurance company.       

The section 3(38) fiduciary provides an additional level of protection over that of a section 3(21) fiduciary.

The distinction between 3(21) and 3(38) fiduciaries should be carefully considered. The primary distinction revolves around the level of responsibility co-fiduciaries have over decisions made by the 3(21) and 3(38) fiduciaries and the level of protection co-fiduciaries have against liability for each type of fiduciary’s actions. ERISA provides more protection to plan sponsors when the hired fiduciary is a section 3(38) fiduciary.

HFG Trust has the ability to act as either a section 3(21) or section 3(38) fiduciary, depending on the needs of the company. More clients are choosing to hire us as a section 3(38) fiduciary in order to gain additional liability protection and to delegate the responsibility of the investment process to a professional. 

Megan Nichols, CFP®