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What's the difference between 3(38) and 3(21) fiduciaries in 401(k) plans?

What's the difference between 3(38) and 3(21) fiduciaries in 401(k) plans?

December 29, 2022
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When it comes to 401(k) plans, there are two main types of fiduciaries: 3(38) fiduciaries and 3(21) fiduciaries. These terms refer to the specific sections of the Employee Retirement Income Security Act (ERISA) that outline the duties and responsibilities of these fiduciaries. While both types of fiduciaries play important roles in the management of 401(k) plans, they have different levels of responsibility and liability.

3(38) Fiduciaries

A 3(38) fiduciary is a fiduciary who has full discretion and control over the selection and monitoring of the plan's investment options. This means that a 3(38) fiduciary is responsible for choosing the investment options that are available to plan participants and ensuring that those options are appropriate for the plan. A 3(38) fiduciary is also responsible for monitoring the performance of the plan's investment options and making any necessary changes to the investment lineup.

3(38) fiduciaries have the highest level of liability among 401(k) plan fiduciaries. This means that if a 3(38) fiduciary makes a mistake or fails to properly fulfill their duties, they can be held personally liable for any losses that result from that mistake. For this reason, 3(38) fiduciaries are typically professional investment advisors or investment committee members who are well-trained and experienced in managing investment portfolios.

3(21) Fiduciaries

A 3(21) fiduciary, on the other hand, is a fiduciary who provides investment advice to 401(k) plan participants, but does not have full discretion and control over the selection and monitoring of the plan's investment options. This means that a 3(21) fiduciary can provide guidance to plan participants on which investment options may be suitable for their individual circumstances, but they do not have the authority to choose or change the investment options available to the plan as a whole.

Unlike 3(38) fiduciaries, 3(21) fiduciaries do not have the same level of liability. They are not responsible for the overall performance of the plan's investment options and are not held personally liable for any losses that may result from the plan's investments. However, 3(21) fiduciaries are still subject to certain requirements and duties under ERISA, including a duty of loyalty and a duty to act in the best interests of plan participants.

Conclusion

In summary, the main difference between 3(38) and 3(21) fiduciaries in 401(k) plans is the level of responsibility and liability that each type of fiduciary has. 3(38) fiduciaries have full discretion and control over the selection and monitoring of the plan's investment options and are held to the highest standard of liability, while 3(21) fiduciaries provide investment advice to plan participants but do not have the same level of responsibility and liability. Both types of fiduciaries play important roles in the management of 401(k) plans, and it is important for plan sponsors and participants to understand the differences between them.