3(21) vs. 3(38) Fiduciary Services

Empowering 401(k) plan sponsors to choose between shared advice and full investment discretion.

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401(k) Fiduciary Framework

Risk & Responsibility Matrix

Choosing the right 401(k) framework dictates your corporate liability, shifting from severe personal exposure under a self-managed plan to shared risk with a 3(21) advisor, or achieving maximum legal protection by outsourcing all investment discretion to a 3(38) Investment Manager.

No Fiduciary (Sponsor Managed)

  • Internal company committee selects all funds
  • Internal company committee retains full discretion.
  • Employer bears 100% of corporate legal liability.
  • Requires maximum internal investment expertise.
  • High administrative burden to track compliance data.
  • Severe personal liability for corporate officers.

ERISA 3(21) (Fiduciary Advisor)

  • Internal committee selects funds using advisor data.
  • Internal company committee retains final decision power.
  • Legal liability is shared between sponsor and advisor.
  • Requires moderate internal investment expertise.
  • Medium administrative burden to log received advice.
  • Residual co-fiduciary risk remains on sponsor.

ERISA 3(38) (Investment Manager)

  • Expert manager selects, monitors, and replaces all funds.
  • Expert manager holds full discretionary decision power.
  • Investment legal liability shifts entirely to manager.
  • Requires zero internal investment expertise from sponsor.
  • Low administrative burden with manager-led records.
  • Maximum corporate and personal protection.

Frequently Asked Questions

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

The main difference is discretionary authority. A 3(21) fiduciary provides investment recommendations, but the 401(k) plan sponsor retains final decision-making power and shared liability. A 3(38) fiduciary possesses full discretionary authority to select, monitor, and replace investments independently, legally shifting the investment liability away from the plan sponsor.

Can a 401(k) plan sponsor completely eliminate personal liability by hiring a 3(38) fiduciary?

No, a plan sponsor cannot completely eliminate all liability. Under ERISA law, the sponsor retains residual fiduciary liability for the prudent selection and ongoing monitoring of the 3(38) investment manager. However, the sponsor is legally insulated from the liability of individual fund performance and selection.

Why is an ERISA 3(38) investment manager considered the best option for employers?

A 3(38) manager is the best option because it offers the highest level of corporate and personal risk mitigation. It relieves company executives of the burden of investment decision-making, eliminates operational delays in fund replacement, and requires zero internal financial expertise to maintain a compliant 401(k) plan.

Is a 3(38) fiduciary service more expensive than a 3(21) service?

Not with Gordon Asset Management. While some providers charge a premium for assuming legal discretion, the overall cost of a 3(38) service is often offset by the hours saved through streamlined operations.

What is the "Prudent Expert" standard required of 401(k) plan sponsors?

Under ERISA Section 404(a)(1)(B), the U.S. Department of Labor (DOL) enforces a "Prudent Expert" standard. This means if an employer lacks the specific internal expertise to thoroughly analyze and monitor a complex 401(k) investment lineup, they are legally required by the DOL Fiduciary Guidelines to hire a qualified professional. Opting for a 3(38) investment manager satisfies this legal mandate by legally delegating those technical tasks to an outside expert.

How does the DOL view the ongoing monitoring of a 3(38) investment manager?

According to the DOL's Meeting Your Fiduciary Responsibilities Guide, employers are legally insulated from the individual fund choices of a 3(38) manager but must periodically review the manager. The DOL requires employers to objectively evaluate the manager's performance, ensure they are adhering to the plan's Investment Policy Statement (IPS), and benchmark their fees to guarantee they remain reasonable.

What are the consequences of failing to follow a documented investment selection process?

The DOL's process-based framework dictates that how investment decisions are made matters more than the final performance outcome. If a corporate officer fails to maintain a formal, documented review process, the IRS Fiduciary Guidelines and DOL warn that executives can face personal civil liability for plan losses and statutory penalties. A 3(38) manager mitigates this risk by taking over the documentation burden entirely.

Does a plan sponsor violate ERISA by using retail investment share classes or ignoring Collective Investment Trusts (CITs)?

Yes, it can trigger liability. The DOL and IRS mandate that plan fiduciaries must only pay reasonable expenses from plan assets. If an employer populates a 401(k) menu with expensive retail share classes when identical, lower-cost institutional shares or Collective Investment Trusts (CITs) are available, it violates the ERISA Duty of Prudence. An expert 3(38) Investment Manager actively protects your firm by automatically utilizing purchasing power to secure institutional pricing and institutional-only CIT structures to eliminate unnecessary fee drag.

The 6-Step 401(k) Fiduciary Health Check

This comprehensive health check allows plan sponsors to systematically evaluate their current 401(k) setup, identify hidden corporate liabilities, benchmark service quality, and determine if they have maximized their legal protection by upgrading to a 3(38) Investment Manager.

 

01: Verify Your Advisor's Fiduciary Status

Determine if your plan currently has a designated fiduciary advisor, and explicitly clarify if they operate under a 3(21) or 3(38) framework. If you must sign off on every fund change, you are using a 3(21) model and still retain final legal liability.

02: Review Your Investment Policy Statement (IPS)

Confirm that your 401(k) plan has a formal, written Investment Policy Statement and check the exact date it was last reviewed. Operating a plan without a regularly updated IPS creates an immediate compliance red flag for DOL auditors.

 

03: Benchmark All Plan Fees for Reasonableness

Uncover the total fees being charged to your plan assets and benchmark them against industry averages to prove they are reasonable. The DOL heavily penalizes plan sponsors who fail to monitor and document that their administrative and investment fees are fair.

 

04: Perform a Quality and Service Audit

Evaluate the tangible support your advisor delivers by analyzing their committee meeting frequency, employee education programs, and investment menu design. A high-quality partner provides regular meetings, robust staff training, and a thoughtful, customized fund menu rather than a generic off-the-shelf lineup.

05: Analyze Fund Share Classes and CIT Availability

Audit your current investment menu to see if your plan is using expensive retail share class funds instead of lower-cost institutional shares or Collective Investment Trusts (CITs). Failing to utilize institutional pricing when your plan size qualifies is a primary target for fiduciary lawsuits.

Confirm Advisor-Led Fiduciary Education

Check if your current advisor provides formal fiduciary education and training to your internal company committee members. Corporate officers must be actively trained on their legal obligations under ERISA law to ensure your business remains fully compliant.

Claim Your Complimentary 401(k) Fiduciary Health Audit

Don’t wait for a Department of Labor audit to find the hidden gaps, excessive fees, or retail share class traps in your current corporate 401(k) plan.

Our team of ERISA specialists will perform a comprehensive, independent evaluation of your current plan structure at zero cost to your firm.

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