ERISA 3(21) vs. 3(38): What Plan Sponsors Are Actually Delegating

An ERISA 3(21) investment adviser recommends; the plan sponsor decides, and the sponsor keeps fiduciary liability for each investment decision. An ERISA 3(38) investment manager decides; it takes discretion over the plan's investment lineup, and the sponsor's investment liability narrows to one duty: selecting that manager prudently and monitoring it. Neither arrangement removes fiduciary responsibility from the sponsor entirely. Administration, fees, contribution timing, and oversight of every hired provider remain the sponsor's job under either model.

What does ERISA fiduciary status mean for a plan sponsor?

The Employee Retirement Income Security Act of 1974 (ERISA) governs most private-sector retirement plans, including 401(k)s. Under ERISA Section 404(a), plan fiduciaries must act solely in the interest of participants, for the exclusive purpose of providing benefits and defraying reasonable expenses, with the care, skill, prudence, and diligence of a prudent expert.

Fiduciary status under ERISA is functional. Anyone who exercises discretionary authority over plan management or assets, or who renders investment advice for a fee, is a fiduciary regardless of title. The business owner or committee that sponsors a 401(k) is almost always a fiduciary, and fiduciaries can be personally liable for losses caused by a breach. ERISA Section 405 adds co-fiduciary liability: a fiduciary can be responsible for another fiduciary's breach if it knowingly participates in it, conceals it, or fails to remedy it.

That liability is why the distinction between Sections 3(21) and 3(38) matters. The two sections describe different roles a hired investment professional can play, and they shift different amounts of responsibility.

What does a 3(21) investment adviser actually do?

ERISA Section 3(21) defines fiduciary status generally; in industry shorthand, a "3(21) adviser" is a co-fiduciary that gives investment recommendations to the plan. The adviser proposes the fund menu, suggests replacements, helps draft the investment policy statement, and typically attends committee meetings.

The defining feature is that the sponsor retains discretion. The committee votes to add or remove each fund. Because the sponsor makes the decisions, the sponsor keeps fiduciary responsibility for them, sharing it with the adviser rather than transferring it. A 3(21) arrangement adds expert input and a co-fiduciary to the table, but if a fund choice is later challenged as imprudent, the committee that approved it is squarely in scope.

This model fits sponsors who want control over the lineup, have a committee with the time and competence to deliberate, and want professional advice documented in meeting minutes.

What does a 3(38) investment manager take over?

ERISA Section 3(38) defines an "investment manager": a fiduciary with the power to manage, acquire, or dispose of plan assets, which must be a registered investment adviser under the Investment Advisers Act of 1940 or state law, a bank, or a qualified insurance company, and which must acknowledge its fiduciary status to the plan in writing. All three elements are required by the statute.

When a sponsor properly appoints a 3(38) manager, the manager selects, monitors, and replaces the plan's investments on its own authority. Under ERISA Section 405(d), trustees and other fiduciaries are generally not liable for the individual investment decisions of a properly appointed investment manager. The sponsor no longer votes on funds; it receives reporting on what the manager did and why.

The liability transfer is real but bounded. The sponsor remains responsible for the prudence of hiring that manager, for monitoring its performance and fees on an ongoing basis, and for replacing it if it fails. Delegation converts a fund-by-fund duty into a manager-level duty; it does not create a liability-free plan.

What stays with the sponsor no matter what?

A sponsor cannot delegate its way out of the following, under either model:

• Selection and monitoring of every provider. The U.S. Supreme Court confirmed in Tibble v. Edison International (2015) that ERISA fiduciaries have a continuing duty to monitor investments and remove imprudent ones; the same logic extends to monitoring hired fiduciaries.
• Plan administration. Eligibility, the definition of compensation, testing, notices, and Form 5500 filing sit with the sponsor and its administrative providers, not the investment fiduciary.
• Timely deposits. Employee deferrals must be deposited as soon as they can reasonably be segregated from company assets; late deposits are a frequent Department of Labor finding.
• Fee reasonableness. ERISA requires that the plan pay no more than reasonable compensation for services. No 3(38) appointment covers the fees the sponsor itself agreed to pay recordkeepers, advisers, and managers.

How should a sponsor evaluate 3(21) and 3(38) providers?

Start with the contract, not the marketing. The agreement should state which ERISA section applies, contain the written fiduciary acknowledgment, and define exactly which assets and decisions are covered. Some providers offer 3(38) service on the core lineup but carve out company stock, brokerage windows, or target-date selection; carve-outs are where responsibility quietly stays with the sponsor.

Then evaluate the firm the way you would any fiduciary hire. Confirm registration status and disciplinary history on Form ADV. Ask how the firm is paid and whether any revenue arrives from fund companies, recordkeepers, or insurance products; a conflicted investment fiduciary defeats the purpose of hiring one. Ask for the investment selection methodology in writing, sample monitoring reports, and the documented history of funds the firm has actually removed. A manager that has never replaced a fund is not monitoring.

Finally, match the model to your committee. A sophisticated committee that meets quarterly and wants ownership of decisions may be well served at 3(21). A small business owner wearing five hats, or a committee that has not met in a year, is usually better off delegating discretion at 3(38) and concentrating on oversight.

What is the fee benchmarking duty?

Under the Department of Labor's 408(b)(2) regulation, covered service providers must disclose their compensation to the sponsor, and the sponsor must use those disclosures to assess whether total compensation is reasonable. In practice that means periodically benchmarking the plan's all-in cost, recordkeeping, investments, and advice, against comparable plans, and documenting the exercise. Many ERISA practitioners suggest a formal benchmarking or market check every few years; excessive-fee litigation has made the documented file, not the fee level alone, the sponsor's best protection.

Consider a hypothetical illustration. A manufacturer sponsors a $15 million 401(k) with 120 participants. A benchmarking study shows an all-in cost of 1.05% of assets, about $157,500 per year, versus roughly 0.65% for comparable plans. The committee finds the gap comes from retail share classes and recordkeeping paid through revenue sharing. Moving to institutional share classes and a flat recordkeeping fee brings the plan near benchmark, saving participants roughly $60,000 per year. Nothing about that exercise required a 3(38); it required the sponsor doing the non-delegable part of the job. This example is hypothetical and for illustration only.

Key differences at a glance

Frequently asked questions

Does hiring a 3(38) eliminate my fiduciary liability?No. It transfers responsibility for individual investment decisions to the manager, but you remain liable for prudently selecting and monitoring the manager, plus all administrative and fee duties.

Is a 3(38) more expensive than a 3(21)?Often modestly so, because the manager accepts discretion and the liability that comes with it, though pricing varies widely. Benchmark the all-in cost either way; the model matters less than total reasonable fees.

Can the same firm be both 3(21) and 3(38)?Yes. Some firms advise on part of the plan and exercise discretion over another part. The contract should state which role applies to which assets and decisions.

Who can serve as a 3(38) investment manager?Under the statute, only a registered investment adviser, a bank, or an insurance company qualified in more than one state, and it must acknowledge fiduciary status in writing.

How often should we benchmark plan fees?There is no fixed legal interval, but many ERISA practitioners recommend a documented benchmarking exercise every few years and whenever services or assets change materially. The 408(b)(2) disclosures are the starting data set.

Is this the same as the fiduciary question for my personal accounts?It is related but distinct. ERISA governs the plan; our article on RIA versus broker-dealer standards covers the individual-investor version of the fiduciary question.