What is the difference between a 3(21); a 3(38); and a 3(16) fiduciary? Are all ERISA Fiduciaries created equal? Can a 401k Plan Sponsor fully delegate fiduciary responsibility? The answers may surprise you. If you are a plan sponsor, you definitely should know the answer.
The fact is, no matter which Fiduciary definition a professional possesses, the plan sponsor is never completely relieved of fiduciary responsibility. It is important to note that by delegating the responsibilities of investment selection/recommendation or administration, you (personally) and your company never escape fiduciary responsibility.
Let’s start with some definitions:
3(21) Fiduciary – A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee. The plan sponsor/trustee retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility. By properly appointing and monitoring an authorized 3(21) investment manager, a plan sponsor/trustee delegates fiduciary responsibility for the investment decisions made by the investment professional. As with many responsibilities delegated in an organization, the board and/or trustees are essentially “where the buck stops.”
3(38) Fiduciary – ERISA Section 3(38) is the definition of investment manager. An investment manager is a special type of fiduciary who has been specifically appointed to have full discretionary authority and control over actual investment decisions. The manager may select, monitor, remove and replace the investment options offered under the plan. Only certain types of financial institutions may be appointed as a 3(38) investment manager. The 3(38) must be a registered investment adviser, bank or insurance company and must acknowledge its fiduciary status in writing.
Once again, the plan sponsor is ultimately responsible for the oversight of the monitoring of the 3(38) Fiduciary. Here it enters a gray area because the sponsor is not directly responsible for selection and decision-making of investment choices, it is responsible for overseeing the 3(38) Fifuciary. In a lawsuit, a sponsor should have no illusions that they would somehow be completely insulated from any liability arising from alleged misconduct or negligence by a 3(38) fiduciary.
3(16) Fiduciary – The overall benefit of hiring a plan administration fiduciary is to delegate the work and liability when it comes to the day-to-day administration tasks including processing changes to employee savings rates and processing 401(k) loans.
Here’s what the 3(21) and the 3(38) do:
| 3(21) Investment Advisor Fiduciary | 3(38) Investment Manager Fiduciary | |
| Make investment recommendations | YES | YES |
| Make investment decisions | Company/You | YES |
| Monitor Investments for employees | Company/You | YES |
| Design 401(k) rules (example: define compensation, eligibility, etc.) | Company/You | Company/You |
| Track employee eligibility and send IRS notices/disclosures | Company/You | Company/You |
| Responsible for payroll sync and employee changes | Company/You | Company/You |
| Process hardship withdrawals, loans, QDROs | Company/You | Company/You |
| Run nondiscrimination tests | Company/You | Company/You |
| Review, sign, and submit IRS filings (including Form 5500) | Company/You | Company/You |
| Meet Department of Labor 404c education requirements | Company/You | Company/You |
| Review provider in quarterly investment committee meetings | Company/You | Company/You |
source: ForUsAll Blog
Here’s what a 3(16) does (and what’s left on your plate if you don’t hire a 3(16) fiduciary):
| 3(16) Fiduciary | None | |
| Make investment recommendations | Company/You | Company/You |
| Make investment decisions | Company/You | Company/You |
| Monitor Investments for employees | Company/You | Company/You |
| Design 401(k) rules (example: define compensation, eligibility, etc.) | YES | Company/You |
| Track employee eligibility and send IRS notices/disclosures | YES | Company/You |
| Responsible for payroll sync and employee changes | YES | Company/You |
| Process hardship withdrawals, loans, QDROs | YES | Company/You |
| Run nondiscrimination tests | YES | Company/You |
| Review, sign, and submit IRS filings (including Form 5500) | YES | Company/You |
| Meet Department of Labor 404c education requirements | YES | Company/You |
| Review provider in quarterly investment committee meetings | YES | Company/You |
source: ForUsAll Blog
