A 3(21) fiduciary recommends investments and leaves the final call to you; a 3(38) fiduciary makes the investment decisions itself and carries the liability that comes with them. That single difference in authority drives every other distinction between the two roles under the Employee Retirement Income Security Act of 1974 (ERISA), including how much work your committee does, how much legal risk you carry, and what a lawsuit over investment losses looks like. Choosing between a 3(21) and a 3(38) fiduciary is really a choice about how much control you want to keep and how much liability you want to hand off.
What the Two Roles Are
Both roles come from ERISA and both carry fiduciary duties, but they cover different functions.
A 3(21) fiduciary is an investment advice fiduciary. Under ERISA Section 3(21), the person renders investment advice to the plan for a fee on a regular basis, the plan and advisor mutually understand the advice will be a primary basis for investment decisions, and the advice is individualized to the plan’s needs.1eCFR. 29 CFR 2510.3-21 – Definition of Fiduciary The advisor recommends; you decide.
A 3(38) fiduciary is an investment manager with discretionary authority to acquire and dispose of plan assets. To qualify, the entity must be a registered investment adviser under federal or state law, a bank as defined under the Investment Advisers Act of 1940, or an insurance company qualified to perform investment services under the laws of more than one state, and it must acknowledge its fiduciary status in writing.2eCFR. 29 CFR 2510.3-38 – Filing Requirements for State Registered Investment Advisers to Be Investment Managers The manager decides and executes on its own authority.
Who Does What Day to Day
The workflow gap is where most plan sponsors feel the difference.
With a 3(21) advisor, you stay in the loop on every investment change. The advisor evaluates the funds in your lineup, monitors performance against benchmarks, and prepares recommendations. If a large-cap fund has been trailing its index for several quarters, the advisor might suggest a replacement. But the advisor cannot make the swap. Your investment committee reviews the recommendation, votes at a meeting, and signs the instruction that tells your recordkeeper to execute the trade. Every decision is yours, and every decision is a fiduciary act that needs a documented rationale.
With a 3(38) manager, the manager handles the full cycle. Guided by an Investment Policy Statement, the manager selects the funds, decides when to replace them, and sends instructions directly to the recordkeeper. Your committee learns about the change after the fact. You still meet periodically, but the agenda shifts from picking funds to reviewing the manager’s work.
That shift changes what your committee needs to be good at. A 3(21) arrangement asks your committee to have real investment knowledge and enough calendar time to meet whenever changes come up. A 3(38) arrangement asks much less of both. The committee’s job becomes oversight of the professional making the decisions rather than making the decisions itself.
Where the Liability Sits
Liability is usually the point of the whole comparison.
Under a 3(21) arrangement, you and the advisor share fiduciary responsibility for the investments. If a participant sues over poor fund choices, pointing at the advisor’s recommendation doesn’t get you out of it. You approved the decision, so you own it, and you have to show you followed a prudent process in weighing the advice before accepting it.
A 3(38) arrangement shifts the primary investment liability to the manager. Federal law says so directly: when an investment manager has been properly appointed, the plan trustee is not liable for the manager’s acts or omissions and is not obligated to manage any asset under the manager’s control.3Office of the Law Revision Counsel. 29 USC 1105 – Liability for Breach of Co-Fiduciary A claim over a fund the manager selected runs against the manager, not against you.
The hand-off has edges. You remain responsible for prudently selecting the manager in the first place and for monitoring the manager’s performance over time. Hire someone without checking their credentials, or leave a manager in place through years of underperformance, and you can still be liable for those failures.3Office of the Law Revision Counsel. 29 USC 1105 – Liability for Breach of Co-Fiduciary Liability shifts for investment decisions. It does not shift for the decision to hire or keep the manager.
The consequences on the fiduciary side are serious. A fiduciary who breaches ERISA duties is personally liable to restore any losses the plan suffered and to give back any profits the fiduciary earned from improper use of plan assets, and a court can remove the fiduciary from the role.4Office of the Law Revision Counsel. 29 USC 1109 – Liability of Fiduciaries The Department of Labor can also assess a civil penalty equal to 20% of the recovery amount in any breach case it pursues or settles.5Office of the Law Revision Counsel. 29 USC 1132 – Civil Enforcement Whether that liability lands on you or on the outside professional depends on which model you chose.
What Stays Your Job Either Way
Neither model lets you off the hook completely, because ERISA judges you on process, not outcomes. The Department of Labor emphasizes that prudence focuses on how you make decisions. If you lack investment expertise, hiring a professional is the prudent move, but that hiring decision has to be careful and documented.6U.S. Department of Labor. Meeting Your Fiduciary Responsibilities
When you bring on either type of fiduciary, solicit proposals from multiple candidates using the same criteria so the comparison is real and the paper trail shows it. Compare qualifications, track records, fee structures, and the scope of services offered. Write down why you picked who you picked, and keep it.
Ongoing monitoring matters just as much. Review the fiduciary’s performance at least annually, benchmark their fees against the market from time to time, and record the results in meeting minutes. Good minutes capture who attended, what materials were reviewed, what questions came up, what was decided and why, and what follow-ups were assigned.6U.S. Department of Labor. Meeting Your Fiduciary Responsibilities If anyone later questions your oversight, these records are the evidence that you acted prudently.
How to Choose Between Them
The right answer depends on your committee.
A 3(21) arrangement works well when you have someone internally with genuine investment knowledge, not just general finance experience, and enough bandwidth to meet regularly, read performance reports, and make informed calls. Some sponsors want that level of involvement, and if your committee can actually deliver it, the 3(21) model lets you keep full control.
A 3(38) arrangement tends to fit better when your committee lacks deep ERISA or investment expertise, when members are too busy to weigh in on fund-level decisions, or when you simply want maximum fiduciary protection. ERISA holds you to a prudent expert standard, meaning you are judged against what a knowledgeable professional would do. If your committee can’t clear that bar on its own, outsourcing the discretionary authority to a qualified manager is often the more prudent choice.
One warning. A 3(21) that goes unused is worse than either model done right. If you hire an advisor for recommendations and then don’t have the time or expertise to evaluate them well, you get the workload of a 3(21) and the exposure of one, without the protection of a 3(38).
Costs and Insurance
A 3(38) manager typically costs more than a 3(21) advisor because the manager takes on both the work and the liability. Higher fees are not automatically a worse deal. Weighed against reduced legal exposure and the staff time you get back, many employers find the added cost worth paying. Ask any candidate for a fee schedule expressed as a percentage of plan assets, and benchmark it against comparable plans of your size.
Either model, look at insurance separately. A fidelity bond under ERISA Section 412 protects the plan against theft or dishonesty but does not cover fiduciary errors in judgment. Fiduciary liability insurance is a separate product that covers defense costs and settlements arising from claims of imprudent investment decisions, excessive fees, or procedural failures. ERISA doesn’t require it, but given that fiduciaries face personal liability for plan losses, most advisors treat it as a practical necessity rather than an optional expense.