ERISA §3(38) vs. ERISA § 3(21)…who are they and what is the definition? We see many clients, advisors and others being confused on the differences and benefits between a 3(38) Investment Manager and a 3(21) Investment Advisor.
3(38) Investment Manager Section 3(38) is an “investment manager” and by definition is a fiduciary because they take discretion, authority and control of the plan’s assets. ERISA provides that a plan sponsor can delegate the significant responsibility (and significant liability) of selecting, monitoring and replacing of investments to the 3(38) investment manager fiduciary.
A 3(38) fiduciary can only be (a) a bank, (b) an insurance company, or (c) a registeredinvestment adviser (RIA) subject to the Investment Advisers Act of 1940. The plan sponsorsigns over authority to the 3(38) fiduciary to make all investment decisions. The 3(38) fiduciaryassumes legal responsibility and liability for the decisions it makes.
Please note: the plan sponsor cannot completely eliminate its fiduciary liability. The plan sponsor is still responsible for the prudent selection of the 3(38) investment manager and must monitor and benchmark that 3(38) investment manager.
ERISA Section 3(21) Investment Advisor
Any individual can be a fiduciary under section 3(21) if he/she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he/she renders investment advice for a fee; if he/she has any discretionary responsibility in the administration of the plan, or is named in the plan documents.
When a plan sponsor adopts the advisor’s recommendations, the plan sponsor retains all of the fiduciary responsibility and liability of the decisions.
A 3(21) Investment Advisor doesn’t completely protect the plan sponsor from fiduciary liability to the degree a 3(38) would. Instead, they may share some of the liability related to investment decision making with the plan sponsor.
If the advisor is named in the plan document and/or actually handles some portion of the plan’s administration by making decisions that affect the plan, then yes, he or she is a fiduciary under 3(21). Similarly, if the advisor has discretionary control over the plans assets (actually makes decisions and has authority or control of the assets), then yes, he or she is a fiduciary under section 3(21).
However, if the advisor is only giving recommendations and the plan sponsor has the discretion to take or disregard the advice, then the advisor is probably not acting as a fiduciary and offers no practical protection from liability for the plan sponsor. That is significantly different than a 3(38) investment manager who is presumed by definition to have actual discretion and control over all of the plan’s assets and management.
Have additional questions about retirement plans for your business or clients? Contact American Pension Advisors, located in Indianapolis, Indiana, for all your retirement plan questions.