3(21) vs. 3(38) Fiduciary: Who Holds the Investment Liability for Your Plan?

What is the difference between a 3(21) and a 3(38) fiduciary?

Both are ERISA fiduciary roles named after sections of the law, and both must act in the plan's best interest. The line between them is who makes the final call. A §3(21) advisor gives advice; the plan committee votes and owns the decision. A §3(38) investment manager has discretion to select, monitor, and replace the plan's investments, and carries the liability for those decisions under ERISA §405(d)(1).

What does a 3(21) advisor do?

A 3(21) advisor brings research and recommendations to the committee, and the committee votes. That keeps control in the room, which some boards want. The cost is that every allocation call, every fund change, and every meeting that did not happen on time belongs to the committee. When markets move between quarterly meetings, the delay is the committee's to answer for.

For a committee with real investment expertise and the time to meet and act, that control is worth keeping. For a volunteer board that meets four times a year, it can turn into a bottleneck where nobody is clearly accountable.

What does a 3(38) manager do?

A 3(38) manager takes discretion over the investments within the policy the board sets, and takes the fiduciary liability for those decisions. Fund changes happen in days, not quarters, and there is one accountable party for how the lineup was built and watched. The board's job narrows to the part boards are structurally good at: setting policy, then selecting and monitoring the manager.

This does not erase the board's duty. It moves the investment decisions to a professional who can be held to account and, if needed, replaced. Prudent delegation is expressly allowed; delegation without monitoring is where boards get exposed. It is the same principle that governs an OCIO relationship on the endowment side.

Which one does your plan need?

Start with your committee, not your asset size. If your committee has investment professionals who meet often and act quickly, a 3(21) can work well and keeps you in control. If your committee is a rotating group of volunteers stretched across other duties, a 3(38) usually serves the plan and its participants better, because decisions get made on time and the liability sits with a professional.

The answer can differ by organization even at the same size. A for-profit business owner running a 401(k) and a nonprofit running a 403(b) face the same choice, and I help each map it to their own reality.

Where a pooled plan fits

A pooled employer plan usually bundles a 3(38) investment manager and a §402(a) named fiduciary into the structure, so a small employer gets discretionary investment management and administrative coverage without hiring each role separately. That is a large part of why a PEP cuts the fiduciary burden for a small nonprofit or business. I walk through the full structure in pooled employer plans for nonprofits.

The Department of Labor's fiduciary responsibilities guidance is a useful primer on what the duty to monitor actually requires.