ERISA defines two different levels of fiduciary services that enhance section 404(c) protection: section 3(21) and section 3(38) services. With section 3(21) services, a “3(21) fiduciary” advisor acts as a co-fiduciary with the plan’s sponsor. The 3(21) fiduciary serves as the plan’s financial advisor and makes fund recommendations, but the ultimate discretion to implement changes and make decisions remains with the plan’s sponsor, who retains all fiduciary duties and any related liability. With section 3(38) services, a “3(38) fiduciary” not only selects the fund line-up but actually serves as the investment manager of the plan and has full discretion to implement any changes to the fund lineup. Under the 3(38) services model, the plan sponsor shifts its fiduciary responsibilities and any related liability concerning the fund lineup to the 3(38) fiduciary.
So which level of service best suits your clients? Are your clients a 3(21) or a 3(38)? As most things in life, it depends.
Some sponsors have more confidence and more experience with managing their fiduciary investment responsibilities. Some want to retain greater control and choice of investment funds. Others want to protect themselves as much as possible and are willing to give up some control to do so.
Increasingly, fiduciary investment services are providing choices within the traditional levels of support to allow for greater customization. Having different levels of fiduciary services available provides options that allow sponsors to act in the best interest of their plan—with different levels of advice and guidance—in doing so.
Most 3(38) services require sponsors to select their investment options from a specific, limited list of approved funds. However, some firms are expanding their lists of available funds to enable sponsors greater ability to tailor investment choices to their individual retirement plan. When considering a 3(38) provider, closely evaluate both the quality as well as the range of choices of investment options.
As with a quality clothier, service matters when selecting a fiduciary service provider. A premier 3(38) service should automatically update fund choices, including at the sponsor level, to ensure 404(c) compliance. That means sponsors can take an “eye in the sky” approach, shifting the burden of monitoring investment choices for compliance to a third party.
Depending on the needs of the plan, however, the sponsor may want to exercise greater discretion over the choice of funds. In those instances, a 3(21) service may be most appropriate. With a 3(21) service, sponsors share their fiduciary investment responsibility and retain the ultimate decision-making authority. Sponsors typically are required to choose at least one investment option from each of four core asset classes (cash equivalent, domestic bond, domestic equity and foreign equity) from a pre-selected list. Sponsors are responsible for making ongoing investment line-up changes in order to maintain the core asset class requirements.