The power behind the 3(21) and 3(38) numbers

You’re the business owner, you love to have control. You’re excited to take on the fiduciary role for your 401(k) plan but are you really the right person? Experts warn you may want to think twice about that decision. The truth is, most plan sponsors lack the investment expertise to select or evaluate funds and run the risk of not knowing what they don’t know – something that could definitely turn into a liability down the road. 

Time, effort and responsibility 

In the fiduciary world, there are an infinite number of unique product offerings that fall under two generalized categories, a 3(21) investment advisor and a 3(38) investment manager. A 3(21) investment advisor provides advice and recommendation on plan investments but the plan sponsor retains the fiduciary responsibility for making the actual investment decisions. With a 3(38) investment manager, the investment manager and not the plan sponsor assumes total responsibility for the investment lineup.  A plan sponsor will have greater responsibility and need to spend more time and effort to diligently perform investment functions using a 3(21) than they would have if this were outsourced to a 3(38).  The nuances of a specific offering is often so complex that it can be difficult for 401(k) experts to differentiate.

What a sponsor needs and what a sponsor wants are often different. A lot of sponsors need a 3(38) to make the investment decisions but don’t want to lose control. Since investments are the more appealing part of 401(k) management – it’s often where sponsors feel they can make a difference.   It makes the 401(k) meetings more interesting.

Plan sponsors need to delegate responsibilities if they are not equipped to prudently manage them.  ERISA Section 404 notes that a fiduciary shall discharge their duties “with the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in an enterprise of like character and with like aims.” There’s a lot required of a small business owner who isn’t in the financial services industry. If a sponsor doesn’t have the skills, the function should be outsourced to someone who does have the expertise.

2 reasons why a Plan Sponsor should choose a 401(k) plan that includes a 3(38) advisor

Time – The amount of time it takes to create an investment policy and select and monitor fund lineups can be substantial. Business owners and other decision makers will inevitably have many other things to do that are higher priority than the investments.  Letting someone else take the reins and responsibilities here makes a lot of sense. 

Expertise – Many business owners establish 401(k) plans as part of a benefit package as a way to attract and retain talent, not because they want to manage one. The lack of expertise makes it very difficult to fulfill the fiduciary requirements under ERISA. 

If time and expertise are lacking, a plan sponsor will be opening themselves up to potential liability for breaching fiduciary responsibility. Claims have recently been made of several firms in the financial services industry – if financial services companies can’t get this right, what are the odds of a small business owner getting it right without help?

What’s NOT in the Numbers?

In addition to understanding the nuances of a particular 3(21) or 3(38) service plan sponsors also need to be cognizant of the responsibilities that are not covered.  Often, the plan sponsors retain responsibility for setting the investment policies (i.e. telling the investment fiduciary “how” to do their job), which will have a meaningful impact on the investments that are recommended or selected. To unknowing plan sponsors, this kind of under-the-radar responsibility can offset some or all of the benefits of using a fiduciary provider. The CoPilot offering addresses this risk by naming an Investment Fiduciary (not the plan sponsor) in the plan document who is responsible for setting investment policies and hiring/firing investment managers. With this, the plan sponsor is as isolated as possible from investment responsibilities.

Current DOL rulings redefines the Fiduciary

The redefinition of “fiduciary” under ERISA §3(21), as finalized by the DOL in April 2016, was intended to significantly expand the number of providers that are subject to a fiduciary standard of care for financial services. Some providers have agreed to transition non-fiduciary business to fiduciary business – either 3(21) or 3(38).  Others have modified their agreements for non-fiduciary service to ensure that only non-fiduciary services are covered. The biggest issue is that plan sponsors often lack the sophistication to understand the nuances of discretionary or non-discretionary advice, much less the potential ramifications of specific offerings under a “3(21)” or “3(38)” umbrella. There are good reasons to outsource fiduciary responsibilities.  Any outsourced fiduciary offering, whether a 3(21) or a 3(38), can be beneficial – the devil’s in the details.

The good news is that there are experienced 401(k) retirement savings services out there like CoPilot that can take over the fiduciary responsibilities for you. This means you can remain focused on running your business, not managing a retirement plan. It’s about you and your workers owning their own retirement readiness. Contact us online or give us a call to get your plan started: 800.236.7400.

Mark Nicholas, CPC - Chief Compliance Officer at eRIA - - 800-236-7400 x3423

Mark is the subject matter expert on 401(k) regulations, DOL fiduciary rule, investments, participant advice, audits and compliance.