What Is the Difference Between a 3(21) and a 3(38) Fiduciary?

The Short Answer

A 3(21) fiduciary is an investment adviser who provides recommendations to a retirement plan’s committee, which retains final decision-making authority. The adviser shares fiduciary responsibility for the advice it provides, while the plan sponsor remains responsible for the decisions. A 3(38) fiduciary is an investment manager who has discretionary authority to select, monitor, and replace plan investments. By appointing a 3(38) manager, the plan sponsor can transfer much of the responsibility for investment decisions, though it retains the duty to prudently select and monitor that manager.

The terms refer to sections of the Employee Retirement Income Security Act (ERISA) that define fiduciaries and investment managers.

What Does a 3(21) Fiduciary Do?

Under a 3(21) arrangement, the adviser typically helps develop the plan’s investment policy statement, recommends investment options, monitors performance against the policy, and suggests changes. The plan committee reviews the recommendations and decides whether to act on them.

This structure allows sponsors to retain control over investment decisions while benefiting from professional expertise. Because the adviser is a fiduciary for its advice, it shares responsibility for the quality of recommendations. The committee, however, remains accountable for its decisions, including whether to follow or reject the adviser’s advice.

What Does a 3(38) Fiduciary Do?

A 3(38) investment manager has discretion to make investment decisions on the plan’s behalf. It selects the investment menu, monitors the options, and replaces funds when appropriate, generally according to an investment policy statement. Under ERISA, a 3(38) manager must be a registered investment adviser, a bank, or an insurance company, and must acknowledge its fiduciary status in writing.

When properly appointed and monitored, a 3(38) manager assumes responsibility for those investment decisions, which can meaningfully reduce the sponsor’s exposure. The sponsor’s remaining duty is to prudently select the manager, monitor its performance and fees, and confirm it is following the agreed-upon process.

How Do They Compare?

• Decision-making authority: A 3(21) adviser recommends; the committee decides. A 3(38) manager decides.
• Fiduciary responsibility for investments: Shared under a 3(21) arrangement; largely transferred under a 3(38) arrangement.
• Sponsor involvement: Higher with a 3(21), since the committee must evaluate recommendations and act. Lower with a 3(38), though monitoring remains required.
• Control: Sponsors who want to retain control over specific investment choices may prefer a 3(21). Those who prefer to delegate may prefer a 3(38).

Is One Better Than the Other?

Neither is inherently better. The right choice depends on the committee’s expertise, available time, desire for control, and appetite for fiduciary risk. An engaged, experienced committee may value the collaboration of a 3(21) relationship. An organization with limited internal resources or a desire to reduce fiduciary exposure may prefer a 3(38).

Some sponsors also engage a 3(16) fiduciary, a plan administrator who assumes certain administrative responsibilities, such as reviewing distributions or preparing required filings. This is a separate role from investment fiduciary services.

What Responsibilities Always Remain With the Sponsor?

Regardless of the arrangement, sponsors remain responsible for prudently selecting and monitoring service providers, ensuring fees are reasonable, operating the plan in accordance with its documents, and maintaining appropriate governance. Our resource on 401(k) plan sponsor fiduciary responsibilities outlines these duties in more detail, and Newport’s article on the DOL fiduciary rule addresses related regulatory considerations.

Questions to Ask a Prospective Investment Fiduciary

• Will you acknowledge your fiduciary status in writing, and under which ERISA section?
• What is your investment selection and monitoring process?
• How are you compensated, and do you receive any third-party payments?
• How will you document and report on decisions?
• How do you work with the plan’s recordkeeper and committee?

The Takeaway

The difference between a 3(21) and a 3(38) fiduciary comes down to who makes investment decisions and who bears responsibility for them. Understanding both options helps plan sponsors choose a structure aligned with their resources and governance goals. Newport can serve as either an ERISA 3(21) co-fiduciary adviser or a 3(38) discretionary investment manager, depending on how much responsibility a plan sponsor wishes to delegate. Learn more about our institutional fiduciary services.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.