There are many different types of fiduciaries in the business world, and all of them are accountable to their clients in different ways. When it comes to qualified plans, such as a 401k, there are several professionals who are serving the plan in a fiduciary status. Several examples of those fiduciaries are record keeper, third party administer, the plan trustees, and the investment advisor, just to highlight a few. In this write-up, we will focus on the investment advisor and outline the differences between a 3 (21) and 3 (38) investment fiduciary.

3 (21) Investment Fiduciary

This type of advisor provides investment recommendations to the plan trustees. Ultimately, it is up to the trustees to accept or reject those recommendations from the investment advisor. Since the plan trustees make the final decision, they are accepting the liability that goes with making prudent investment decisions. They are also responsible for monitoring the investments and making sure they are suitable based upon the guidance provided by the Department of Labor under the ERISA statute. 

Bottom line: The plan trustees and investment advisors are co-fiduciaries when it comes to all investment decisions. 

3 (38) Investment Fiduciary

A 3 (38) investment fiduciary has full authority and responsibility when it comes to all the investment decisions for the plan. The 3 (38) fiduciary will select, monitor, remove, and make any changes to the plan’s investment options. The 3 (38) investment fiduciary reduces the trustees’ liability, as they are taking responsibility for all investment decisions. 

Bottom line: With this arrangement, the plan trustees are delegating the investment responsibility to the advisor and the advisor is making the day-to-day investment decisions for the plan.

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