401K Fiduciary Responsibility 3(38) v 3(21)
An ERISA section 3(38) fiduciary must make decisions for which it has legal responsibility (and therefore legal liability), because such a fiduciary is charged with ERISA-defined “discretion.” Under ERISA, if an entity has discretion to make a decision, that entity is responsible for that decision, not the entity that appointed it. This gives a plan sponsor significant cover from fiduciary risk. An ERISA 3(38) fiduciary decides what investment options such as stand-alone mutual funds or model portfolios should be placed on a plan’s selection menu, where to remove them from the menu and, if it does remove them, what investment options will replace them. The plan sponsor no longer has any such responsibilities because the sponsor has delegated them to the 3(38) fiduciary.
An ERISA section 3(21) fiduciary makes only recommendations for which it has no legal responsibility (and therefore no legal liability), because such a fiduciary has no ERISA-defined “discretion”. This does not give plan sponsors cover from fiduciary risk. Most cases the advisor is an ERISA 3(21) fiduciary tasked with “recommending,” “assisting,” “helping,” or “advising” the sponsor as the sponsor itself goes about making selection/monitoring/replacement decisions. Such contracts make it very clear that an advisor who is a 3(21) has no legally defined “discretion” to actually make decisions about plan investment options but only to be a helpful resource to the plan sponsor who continues to retain the significant responsibility (and there for the significant liability) to select, monitor and (if necessary) replace plan investment options.
So, What Does This Mean To 401K Plan Sponsors…
A 3(38) fiduciary takes on the fiduciary liability, unlike 3(21) fiduciaries, and hence the corresponding liability and risk associated with platform performance and management. The plan sponsor will be able to delegate what would otherwise be their fiduciary liability to the 3(38) fiduciary.