As defined by the Employee Retirement Income Security Act (ERISA) of 1974, a 3(38) fiduciary advisor is an investment professional who has been appointed to manage an employer's 401(k), 403(b), or other retirement plan assets.
The advisor is responsible for selecting, monitoring, and replacing the plan's stocks, mutual funds, bonds, and other assets. They make independent investment decisions based on general instructions or guidelines from the company or plan sponsor.
ERISA 3(38) advisors have a full fiduciary responsibility, meaning they are legally obligated to act solely in the interests of the plan participants and their beneficiaries.
While investment decisions and management are their primary obligation, these advisors also maintain transparency by reporting account performance to the retirement plan sponsor.
ERISA 3(38) advisors lessen the fiduciary responsibility of their 3(16) counterparts. Nonetheless, 3(38) fiduciaries can be removed or replaced at the discretion of the 3(16) advisors above them, based on the former's professional performance.
ERISA 3(38) fiduciary advisors are responsible for providing independent investment advice and making decisions that are in the best interests of plan participants.
The primary duty of a 3(38) fiduciary advisor is to manage the portfolio of retirement plan assets in accordance with the specific instructions given by the employer.
Their duties include researching and recommending investments, selecting asset classes appropriate to the plan’s goals and objectives, and monitoring the performance of plan investments.
3(38) fiduciaries keep records of all activities related to the investment process and provide reports detailing recommendations. They also give regular financial reviews and alert employers on any changes that must be considered in the retirement plan.
While 3(38) fiduciaries have the authority to spend plan money or trade assets, they do so under the general guidelines set by the plan sponsor or employer. ERISA 3(38) advisors do not need day-to-day approval but must always follow a client's written instructions.
Employers typically set an overall investment strategy for their company's retirement plan. ERISA 3(38) fiduciaries must then select and manage investments based on that strategy. These advisors do not need specific permission to buy or sell any particular asset.
3(38) fiduciaries are also free to advise employers against any particular asset or investment strategy if it conflicts with their own assessment. Nonetheless, ERISA 3(38) advisors must follow the plan sponsor's final decision.
Lastly, being a fiduciary entails ethical, professional, and legal responsibilities. ERISA 3(38) advisors must always act in the best interest of their clients. They cannot have any conflict of interest or choose an investment to enrich themselves.
With the broad range of duties and responsibilities of ERISA 3(38) fiduciaries, this role is generally reserved for registered investment advisors, banks, brokerages, firms, and insurance companies.
Consider the following benefits of working with a 3(38) fiduciary advisor:
An ERISA 3(38) fiduciary can assume fiduciary responsibility for the selection and monitoring of investment choices, relieving plan sponsors of their duty to prudently manage investments.
It reduces employers’ potential personal liability on the performance of the investment portfolio of their company's retirement plan.
ERISA 3(38) fiduciary advisors are experienced professionals with the extensive market knowledge and the necessary skills to manage a retirement plan effectively.
These fiduciaries have specialized training and expertise in retirement planning and investments. By entrusting decision-making responsibility to an experienced professional, employers can expect higher investment returns over the long term.
ERISA 3(38) fiduciary advisors can customize investment portfolios tailored to the needs of plan participants based on their individual retirement goals and risk tolerances.
3(38) advisors ensure each employee has suitable investments for their specific situation. It also gives employers confidence that their employees are more likely to remain invested in the plan instead of opting out or transferring funds away from it.
An ERISA 3(38) fiduciary advisor must monitor investments continuously for performance and compliance. They regularly review the plan’s investment options and adjust them, if necessary, to reduce risks and maximize returns over time.
They also proactively address any issues or changes that may arise throughout the year. It reduces an employer's administrative responsibilities.
Hiring an ERISA 3(38) fiduciary advisor to oversee the plan's investments can significantly reduce the amount of time employers spend managing their retirement plans. Advisors are available to answer any questions and provide guidance to sponsors and employees alike.
It allows employers to focus on the core aspects of running their business while still providing employees with a secure retirement plan.
Working with a 3(38) fiduciary can mean higher costs, loss of control, restricted investment options, and limited transfer of fiduciary responsibility. It also requires established trust and communication.
Hiring a 3(38) fiduciary advisor can be expensive, especially for employers with smaller retirement plans. These advisors take on huge responsibilities and liabilities in managing investments that cost money.
The fees charged by the advisor will depend on the scope of services, plan size, and specific provider or firm. It is important for employers to make sure that they are getting value for their money before selecting a 3(38) advisor.
When an employer hires a 3(38) fiduciary advisor, they give up control over investment decisions. While plan sponsors provide written instructions and guidelines, it can be difficult for employers who are used to making their own decisions about investments.
Employers may also have difficulty trusting that their selected fiduciary will make wise decisions on behalf of the retirement plan. It is important to select a qualified and experienced advisor that meets all legal requirements for fiduciaries.
ERISA 3(38) advisors are required to select investments that are suitable for the plan participants. Since investment decisions are delegated to these advisors, employers can have restricted options of funds or assets to invest in.
This means it can limit the number of investment options available to employers, as the advisor will have a limited universe of approved and recommended investments. As an example, learn more about the sustainable 401(k) portfolio options that Carbon Collective offers in our plans.
When employers hire a 3(38) advisor, they must have trust and communication between the two parties. Employers need to be able to rely on their advisors’ expertise and knowledge when it comes to managing retirement plan investments.
It is crucial for employers to establish clear expectations, objectives, guidelines, and policies with the fiduciary so that they can work together effectively. Lack of trust and communication can cause undue mental stress.
It is not possible for an employer to transfer 100% of their fiduciary liability when they hire a 3(38) advisor. Employers are still ultimately responsible for the plan’s investments and must ensure that the advisors follow all legal requirements.
If any losses or damages occur due to negligence or mismanagement of funds by the advisor, employers could still be held liable. It is important for employers to do thorough due diligence in selecting a qualified ERISA 3(38) advisor to minimize risks.
Employers who offer employee health benefits and retirement plans, such as 401(k)s, may need a 3(38) fiduciary advisor to ensure that the plan meets all of the regulations set forth by the Employee Retirement Income Security Act.
The role of a 3(38) fiduciary is critical in protecting employees’ interests while they are participating in employer-sponsored retirement plans. A 3(38) fiduciary has complete authority to manage and make decisions on behalf of the plan.
If your company wants to reduce fiduciary responsibility for selecting and monitoring a retirement plan's investment, you may consider hiring a 3(38) advisor. These advisors have statutory liability for any losses caused by their decisions when managing the plan.
You may also work with a 3(38) fiduciary to benefit from their extensive knowledge and experience if your retirement plan involves complex investments, especially if your company lacks in-house expertise.
Having a 3(38) fiduciary in your employ can also help during times of economic uncertainty and market volatility. They can adjust and rebalance investments appropriately. While 3(38) fiduciaries cannot guarantee returns 100%, they can certainly improve your chances.
A key difference between a 3(38), 3(21), and 3(16) fiduciary is the scope of authority they possess over managing a retirement plan.
An ERISA 3(38) fiduciary advisor has the broadest scope of responsibility, undertaking full discretion and control over managing the plan’s investments. As such, only registered investment advisors, banks, and insurance companies can be 3(38) advisors.
In contrast, an ERISA 3(21) fiduciary advisor offers consultative advice to a plan’s fiduciary without having discretionary authority over plan assets. They can help select the best investments but have limited fiduciary responsibility. The decision is left to the plan sponsor.
ERISA 3(38) and 3(21) fiduciaries are typically relegated to third-party service providers.
Lastly, an ERISA 3(16) fiduciary advisor is charged with providing administrative services to a retirement plan, like recordkeeping and executing transactions. They distribute plan descriptions, enroll members, and report transactions.
3(16) fiduciaries may be the plan sponsor or administrator. A company may also hire a third-party service provider.
Given these differences in scope of authority, an employer may choose different types of fiduciaries depending on their desired level of involvement in the management of their retirement plans.
Employers who wish for outside professionals to manage their plans completely should opt for an ERISA 3(38) fiduciary advisor. Those who prefer to maintain control over the investments but require additional guidance should consider an ERISA 3(21) advisor.
Those who only need help with administrative services should select an ERISA 3(16) fiduciary.
It is important for employers to understand the nuances of these various types of fiduciaries in order to ensure they are appointing qualified professionals who have the right level of expertise and authority necessary to manage their retirement plans correctly.
An ERISA 3(38) fiduciary advisor is a qualified, registered professional who has been appointed by an employer to manage the employer’s investment portfolio, as defined under the Employee Retirement Income Security Act of 1974 (ERISA).
They are legally responsible for selecting, monitoring, and evaluating investments on behalf of the plan participants, ensuring that they meet ERISA standards.
3(38) fiduciary advisors have the broadest duties and legal responsibilities compared to 3(16) and 3(21) advisors.
The advantages of working with ERISA 3(38) advisors revolve around minimized fiduciary responsibilities for plan sponsors, expert advice, tailored investment options, time savings, and ongoing investment monitoring.
Some drawbacks include higher costs than other ERISA fiduciaries, loss of control for and restricted investment options for plan sponsors, and the need for established trust. It must also be noted that fiduciary responsibility cannot be transferred 100% to 3(38) advisors.
Consider the extent of your company's needs and the complexity of your retirement plan investments before working with an ERISA 3(38) fiduciary advisor. You may also consider 3(21) and 3(16) advisors.
You can outsource administrative tasks and investment management of your company's retirement plans. You benefit from continuous monitoring and expert advice, which saves you time, letting you focus on core business tasks that up your bottom line.
Fees depend on the services provided and the size of the retirement plan. Typically, a 3(38) fiduciary advisor will charge an asset-based fee that is based on a certain percentage of the total assets managed. They generally charge higher fees than 3(21) and 3(16) fiduciary advisors.
Consider hiring an ERISA 3(38) fiduciary if your company's retirement plan has complex investments and you do not have in-house expertise. You can also benefit from 3(38) advisors if you want to reduce your company's fiduciary responsibilities.
The main difference lies in investment selection. An ERISA 3(38) fiduciary advisor has full discretion and control over selecting investments for a retirement plan based on a plan sponsor's overall guidelines. On the other hand, an ERISA 3(21) advisor, while also a fiduciary, only provides investment advice but does not have full discretionary power. The final decision still rests on the plan sponsor.
It is possible to switch from an ERISA 3(38) to an ERISA 3(21) Fiduciary Advisor, though the process can be more complicated than simply hiring a different advisor for each type. To make the transition, employers must first ensure that their current ERISA 3(38) advisor will accept the role change and agree to serve as an ERISA 3(21). Then, they must review the new fiduciary’s capabilities and qualifications before executing a contract for their services.