Choosing the Right Fiduciary Support for Your Business’s Retirement Plan: 3(21) vs. 3(38)
As a business owner, managing your company’s retirement plan can feel like a balancing act. You want to offer a quality retirement plan to your employees while ensuring it meets regulatory requirements and stays competitive. One of the most important decisions you’ll face is selecting the right fiduciary support for your plan.
The two primary types of fiduciary investment advisors under ERISA (Employee Retirement Income Security Act) are 3(21) advisors and 3(38) investment managers. While both play key roles, they differ significantly in terms of responsibility, liability, and cost. Understanding these differences will help you make an informed decision about which option best suits your business and your employees’ needs.
What Is a 3(21) Advisor?
A 3(21) advisor is a co-fiduciary and consultant to the plan sponsor. While they don’t have discretionary control over the plan’s investments, they provide essential guidance to help plan sponsors make informed decisions. Here’s what they do:
- Recommending investment options for the plan’s lineup
- Monitoring fund performance and suggesting necessary changes
- Assisting with vendor selection, including third-party administrators and custodians
In a 3(21) arrangement, the advisor is liable for the quality and prudence of their advice while the plan sponsor retains the final decision-making authority and shoulders the primary liability. For example, if the advisor recommends replacing an underperforming fund, it’s up to the sponsor to evaluate the recommendation and implement the change.
This option is ideal for businesses that want to stay hands-on with their plan and have the final say while balancing the fiduciary responsibility with professional advice. However, this also means more involvement, greater fiduciary liability, and additional administrative tasks for the plan sponsor.
What Is a 3(38) Investment Manager?
A 3(38) investment manager takes on a more comprehensive role with full discretionary control over the plan’s investments. This means they are responsible for:
- Selecting and managing the plan’s investment options
- Replacing underperforming investments without requiring sponsor approval
- Handling all investment-related decisions for the plan
With a 3(38) investment manager, you significantly reduce your fiduciary liability. While the plan sponsor still has the responsibility of selecting and monitoring the 3(38) fiduciary, the investment decisions are entirely managed by the professional team, relieving business owners from much of the burden.
This option is ideal for businesses that want to delegate investment decisions to experts while minimizing liability and administrative effort.
Why a 3(38) Fiduciary May Cost More, But Offers Greater Value
It’s well-known that 3(38) fiduciaries typically come with a higher price tag. However, that cost is often offset by the benefits of working with a professional investment manager. Here’s why it’s worth the investment:
1. Reduced Fiduciary Risk
With a 3(38) investment manager, you’re no longer responsible for selecting or monitoring the investments—this shifts liability to the 3(38) fiduciary. This reduces the risk of legal and regulatory issues related to improper investment management.
2. Time Savings & Administrative Relief
Managing a retirement plan’s investments can be time-consuming and requires specialized knowledge. A 3(38) fiduciary reduces your administrative burden by taking full control of investment decisions, freeing you up to focus on running your business.
3. Proactive Investment Management
Unlike a 3(21) advisor, who only suggests changes, a 3(38) investment manager can make immediate adjustments to the investment lineup. This ensures that underperforming funds are quickly replaced, and the plan stays aligned with market conditions and best practices.
4. Increased Employee Confidence
Employees place their financial security in the hands of their company’s retirement plan. With a professional 3(38) investment manager overseeing the fund lineup, employees can feel more confident knowing their retirement savings are being managed by experts rather than business owners with limited investment expertise.
Which Fiduciary Option Is Right for Your Business?
Choosing between a 3(21) and 3(38) advisor ultimately depends on your company’s goals and resources. Here’s a quick breakdown:
| Feature | 3(21) Co-Fiduciary Advisor | 3(38) Investment Manager |
|---|---|---|
| Decision-Making Authority | Plan sponsor retains final say | Advisor has full discretion |
| Fiduciary Liability | Shared with the plan sponsor | Shifted to the 3(38) fiduciary |
| Investment Monitoring | Advisor suggests, but sponsor decides | Advisor manages and implements |
| Administrative Burden | Higher | Lower |
| Cost | Lower | Higher |
If you prefer to maintain control and are comfortable with the responsibilities of plan management, a 3(21) advisor might be right for you. However, if you want to reduce liability, save time, and ensure professional investment management, a 3(38) fiduciary can provide a better overall experience—despite the higher cost.
Final Thoughts
Choosing the right fiduciary support for your business’s retirement plan is an important decision that can impact both your company and employees. While a 3(38) investment manager offers greater protection and efficiency, a 3(21) advisor might be sufficient for businesses that want to retain control and manage the plan more directly. Ultimately, the decision depends on your goals and what will work best for both you and your employees.
Ready to explore fiduciary options for your retirement plan? Connect with a plan specialist to find the best fit for your business. Let’s make sure your employees’ futures are in good hands.
Categories
Recent Insights
-
Hobbies in Retirement: Planning for the Everyday
When we talk about planning for retirement, the conversation almost always starts with the finances. Do I have enough saved? Will my income be reliable? Can I travel, help family members, or give generously? Those are important questions. But there’s another one that tends to get pushed aside—and it may matter just as much: What…
-
The Rise of Financial Independence for Women: Rewriting the Rules of Wealth and Retirement
For generations, financial planning followed a fairly predictable script: get an education, build a career, get married, raise a family, then retire. Today, that script is being rewritten. Women are marrying later than previous generations, and a growing number are choosing not to marry at all. As a CFP® who spends most of my time…
-
Talk Your Chart | Tariffs, the Fed’s Next Move, and Lessons From the Dot-Com Bubble | Ep. 80
In Episode 79 of Talk Your Chart, Marcos and Brett break down the market’s rare pullback, as they talk through the latest jobs report, interest rates, and what could pressure markets next. They also dig into the durability of the AI boom, South Korea’s rise as a global equity market, and how massive IPOs like…
-
Plan Intentionally: Designing Retirement Around the Moments That Matter Most
Retirement planning has always been about more than numbers on a spreadsheet. At its core, it is about securing the freedom to live with purpose, stay connected to the people who matter most, and show up for life’s real moments when they matter most. Too often, conversations about retirement become consumed by growth rates, projections,…
-
What Lubbock Quietly Teaches About Wealth
After years of working with families in Lubbock, we’ve come to appreciate something that rarely gets said out loud: wealth is not just what you accumulate. It is what your environment allows you to keep, experience, and enjoy. And in that sense, Lubbock has a way of teaching lessons that extend far beyond financial planning.…
