The Employee Retirement Income Security Act (ERISA) is a federal law that establishes minimum standards for retirement and health benefit plans in the private sector. One important aspect of ERISA is the requirement for plan sponsors to appoint fiduciaries to manage the plan’s assets and ensure that it operates in the best interests of participants. ERISA recognizes three different types of fiduciary roles: 3(16), 3(21), and 3(38). Not every plan requires all, or even some, of these professionals, but many do. This is especially true of plan sponsors who want to shift the regulatory and civil liability away from the company for how the retirement plan is run. Let’s explore the differences between these three fiduciary roles.
ERISA 3(16) Fiduciary
The ERISA 3(16) fiduciary is often referred to as the “third party administrator” or simply the “plan administrator” because this role involves managing many of the day-to-day administrative tasks associated with running a retirement plan. These tasks may include recordkeeping, preparing and filing Form 5500, distributing required notices to plan participants, and ensuring that the plan operates in compliance with ERISA and other applicable laws.
The 3(16) fiduciary assumes significant responsibilities and liability associated with administering the plan. This fiduciary has discretion and control over plan assets, and is responsible for ensuring that the plan operates in compliance with ERISA and other applicable laws. As such, the 3(16) fiduciary is a co-fiduciary with the plan sponsor and any other fiduciaries.
As 401k and other ERISA plans have become more competitive in the past few years, we often see 3(16) plan administrator functions being offered as an included benefit by the vendor of your plan, but you can also outsource these responsibilities to a third party (hence the term).
ERISA 3(21) Fiduciary
The ERISA 3(21) fiduciary is often referred to as the “investment advisor” because this role involves providing investment advice to the plan sponsor. The 3(21) fiduciary does not have discretion or control over plan assets but provides investment recommendations to the plan sponsor, who retains the ultimate decision-making authority.
The 3(21) fiduciary is responsible for prudently selecting and monitoring investment options available to the plan participants. This fiduciary assumes responsibility and liability for the investment recommendations made to the plan sponsor. If the plan sponsor follows the investment advice provided by the 3(21) fiduciary and suffers a loss as a result, the 3(21) fiduciary may be held liable for that loss.
nVest Advisors can partner with your retirement plan as either a 3(21) plan investment advisor or a 3(38) investment plan manager (see below), depending on the services offered by the plan’s vendor (some assume 3(38) duties automatically), and the extent of the role you want your company’s management to play in overseeing the plan’s investment options.
ERISA 3(38) Fiduciary
The ERISA 3(38) fiduciary is often referred to as the “investment manager” because this role involves assuming complete discretion and control over plan assets. The 3(38) fiduciary has the authority to make all investment decisions on behalf of the plan, including selecting and monitoring investment options and making changes to the investment lineup as necessary.
The 3(38) fiduciary assumes significant responsibility and liability for investment decisions made on behalf of the plan. As such, this fiduciary may be sued if the plan suffers a loss due to a decision made by the 3(38) fiduciary. The plan sponsor may also be held liable for any losses resulting from the 3(38) fiduciary’s actions.
The key differences between the three fiduciary roles are related to the level of control, responsibility, and liability assumed by each fiduciary. The 3(16) fiduciary assumes the most control over plan assets, while the 3(21) fiduciary assumes less control and provides investment advice to the plan sponsor. The 3(38) fiduciary assumes complete discretion and control over plan assets, and as such, assumes the most responsibility and liability. Because of the additional tasks and fiduciary liability, your plan will often pay slightly more for a 3(38) fiduciary than a 3(21) fiduciary.
The Bottom Line
In summary, ERISA recognizes three different types of fiduciary roles: 3(16), 3(21), and 3(38). Each fiduciary role has different levels of control, responsibility, and liability associated with it. While you cannot fully outsource all of your fiduciary responsibility as the plan sponsor, you can outsource the vast majority, particularly the parts that expose your company and its management to the worst civil and regulatory liability. That fact alone is reason to seriously consider whether your plan needs a fiduciary, or if you currently have one, that individual is an effective one.
As a small business ourselves, nVest Advisors is deeply committed to helping small businesses and their teams thrive and prosper. From financial planning for both the owners and employees of the business to 3(21) or 3(38) fiduciary management of your SEP IRA, SIMPLE IRA, 401(k), 403(b), HSA, college savings plans, and other benefits options, we strive to be an integral part of your team’s financial well-being. And being a small company ourselves, we’re small enough to develop a close working relationship with your company and have the resources and investment partners to handle even the largest 401(k) needs.
If your company would like to receive a competitive bid from us for your current programs, or if you need to start a new benefits plan from scratch, we’d love to partner with you. Feel free to schedule a complimentary one-hour due diligence meeting with CEO Jeremy Torgerson, to discuss your needs.