The promise sounds appealing: hire a fiduciary advisor, hand over investment decisions, and sleep better at night knowing someone else is handling the heavy lifting. But the reality is more nuanced than the sales pitch suggests.
Chris Carosa, CTFA, recently examined this tension in Fiduciary News, exploring how the distinction between 3(21) co-fiduciary advisors and 3(38) investment managers creates both clarity and confusion for plan sponsors. The legal difference is straightforward enough. A 3(21) advisor provides investment recommendations, but the plan committee makes final decisions. A 3(38) manager has discretionary authority to select and monitor investments without committee approval.
Where things get complicated is in the execution. Many plan sponsors assume that hiring a 3(38) manager transfers all investment-related liability. It doesn’t. What changes is the nature of your fiduciary duty. Instead of evaluating individual funds, you’re now responsible for prudently selecting and monitoring the fiduciary who’s making those decisions. You still need documentation. You still need regular reviews. You still need to act if something goes wrong.
The oversight gap becomes especially problematic when plan sponsors don’t read the fine print in their fiduciary agreements. Some 3(38) contracts exclude stable value funds and target date funds from their scope of responsibility. These investments can hold the majority of participant assets, which means the plan sponsor has delegated everything except the investments that hold the most money.
Independence is another issue that deserves scrutiny. As the fiduciary marketplace has consolidated under large recordkeeping platforms, the lines between objective advice and embedded incentives have blurred. Proprietary fund requirements and fee reductions tied to specific investment choices remain common, even within supposedly “open architecture” platforms. The question plan sponsors need to ask isn’t just whether their advisor is a fiduciary, but whether that advisor has true independence in fund selection.
The Department of Labor’s Prohibited Transaction Exemption 2020-02 requires financial institutions to disclose conflicts of interest when recommending proprietary products. That’s helpful, but disclosure alone doesn’t eliminate the conflict. Plan committees still need to review Form ADV disclosures, understand revenue sharing arrangements, and verify that their advisor’s compensation structure aligns with participant interests.
The fundamental point is this: delegation without oversight creates new risks rather than eliminating old ones. The fiduciary label has become a product category, marketed as liability relief but often delivering less protection than advertised. Plan sponsors who treat fiduciary relationships as “set it and forget it” arrangements are missing the point entirely.
Whether you work with a 3(21) or 3(38), your responsibility as a plan sponsor doesn’t disappear. It evolves. The best protection comes from understanding exactly what you’ve delegated, what you haven’t, and what your ongoing oversight responsibilities require. That means reading agreements carefully, documenting your decision-making process, and maintaining regular reviews of your fiduciary’s performance and process.
