In my previous article, I provided an overview of what a fiduciary is. It is critical to have a basic understanding of this in order to expand the discussion to service-provider fiduciaries – namely 3(16), 3(21) and 3(38) fiduciaries. Retirement plan fiduciary roles are often discussed as if everyone automatically knows what a 3(16), 3(21), or 3(38) fiduciary is. They sound more like tax code sections than useful service model descriptors. In truth, for most people outside the retirement plan industry, the numeric naming system does not help. Here is the practical breakdown of each of these numerical fiduciaries and what distinguishes each of them.
3(16) Fiduciary
A 3(16) fiduciary is generally responsible for plan administration duties only. The scope of responsibilities depends on the arrangement between the plan sponsor and this type of fiduciary provider. Some of the possibilities include making decisions on distributions and/or loans, providing required disclosures to participants, and handling certain aspects of compliance administration. The important point is that a 3(16) fiduciary deals with plan administration, not the investment options.
3(21) Fiduciary
A 3(21) fiduciary provides investment advice for the plan’s lineup, but the plan sponsor retains the ultimate decision-making authority. That means the advisor may recommend adding, removing, or replacing investment options, but it is the plan sponsor (or investment committee) who decides whether to act on those recommendations. So a 3(21) arrangement can help support the fiduciary process, but it does not hand off final discretion from the plan sponsor and/or committee.
3(38) Fiduciary
A 3(38) fiduciary is an investment manager with the discretion to select, monitor, and replace plan investments. That is the key difference. In a 3(38) arrangement, the investment manager is making those decisions rather than just recommending them. This is why a 3(38) fiduciary must be a Registered Investment Advisor, a bank or an insurance company. This type of fiduciary can shift a significant portion of the responsibility for investment decisions away from the plan sponsor but does not remove it entirely. The sponsor still retains the important fiduciary duty of prudently selecting and monitoring the chosen 3(38) provider. This last part matters. Hiring a 3(38) provider is not the fiduciary equivalent of throwing your car keys to the valet and walking away forever.
This is important as plan sponsors often assume that hiring an advisor means that the advisor has assumed the fiduciary role from the plan sponsor. That is not the case. Understanding the distinction between fiduciary types can help sponsors:
- clarify who is responsible for what,
- avoid gaps in oversight,
- reduce confusion, and
- make informed service provider decisions.
If your plan’s team includes an advisor, TPA, or outsourced fiduciary provider, it is worth confirming exactly which responsibilities have been delegated and which ones still remain with the plan sponsor. Because in fiduciary governance, vague assumptions are rarely your friend.
