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3(21) vs. 3(38) Fiduciary Advisors - Class 309

As the fiduciary process is so important in the world a 401(k) Plans, we have dedicated your entire junior year to Fiduciary Best Practices. If you've been attending class recently, you realize how much work it takes to run a retirement plan in compliance with the Department of Labor's best practices. Most plan sponsors employ the services of an advisor to help them oversee their fiduciary responsibilities. Join us for today's class when we review the roles of 3(21) and 3(38) fiduciary advisors.

In our freshman year, we discuss the differences between brokers and advisors. If you were out partying the night before and skipped that class, please know that a broker does not serve as a fiduciary to your retirement plan and they are compensated differently depending on the Investments they might recommend for your 401(k). This can cause a conflict of interest as the broker may recommend funds that award him greater compensation but also charge higher fees to the participants in the plan. Conversely, advisors serve as a fiduciary on your plan and they are to be unbiased in their investment recommendations as they are paid a fee regardless of the funds they endorse for your plan. This makes advisors legally obligated to do what is in the participants’ best interests. Therefore, we typically recommend that plan sponsors solely interview advisors to support their investment committee as well as the individual plan participants. If you'd like to brush up on the differences between brokers and advisors please review Classes 103 and 104. Should you agree that an advisor is the right fit for your plan, these financial professionals can act in the capacity of a 3(21) or 3(38) advisor.
Let's differentiate the two types of financial professionals by starting with the 3(21) advisor. A 3(21) advisor serves a collaborative role with your investment committee. This advisor’s duties are focused on supporting the investment committee in benchmarking the investment line-up for performance, fees, and suitability. The 3(21) advisor shares their research and recommendations with the investment committee that includes the fund menu including periodic updates. The committee then has the ability to except or reject the advisor’s recommendations. Under a 3(21) arrangement, your team maintains complete control over the investment selection process. This is why the majority of plan sponsors who employ an advisor select the 3(21) option.
A 3(38) advisor serves a similar role in overseeing the Investments offered within the retirement plan. However, the main difference between a 3(21) and a 3(38) advisor is discretion. Unlike a 3(21) arrangement, a 3(38) advisor has the discretion to maintain and update the plan's investment line-up on behalf of the committee and the plan sponsor. The primary benefit of this arrangement is that the fiduciaries on the plan are outsourcing their responsibility for investment selection to the advisor and, as such, are reducing their liability toward designing and updating the investment menu. However, in doing so, the committee is also giving up their control to design and influence the investment line-up on behalf of their participants. This loss of control is the main reason that the 3(38) arrangement is less popular than the 3(21) relationship.
Now that you can differentiate between a 3(21) and a 3(38) advisor, let's review the similarities between the two roles. If you are interviewing advisors to oversee your retirement plan, you might want to draft a checklist to make sure the candidates are performing their role as a fiduciary to your plan. Although we have already covered the following topics in our junior year, please note that these services should be included in a 3(21) or 3(38) advisor’s support model:

  • The Investment Committee
  • The Investment Policy Statement
  • Monitoring Your Investments
  • Meeting Minutes
  • Fidelity Bond/Fiduciary Liability Insurance
  • Benchmarking Your Plan’s Fees
  • The ERISA File
  • Enrollment & Participant Education Meetings

We have dedicated a class to each of the above services in our junior year. If you would like to refresh your memory on any of these topics, please feel free to review Classes 302 through 308.
Once you've selected the advisor you believe is the proper fit for your retirement plan, we will need to communicate the features and benefits the retirement plan to the employees. It means nothing to have a strong retirement benefit if the employees don't see the value in the 401(k). Join us for next week's class when we discuss enrollment meetings and ongoing participant education sessions.

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