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The Fiduciary Focus Blog

What does it mean to hire a 3 (38) Advisor /  Investment Fiduciary?

Benjamin Smith, CFA 25 January, 2017

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It seems that daily there is more litigation  news that alleges employers violated their fiduciary duty to prudently select and monitor the investment options offered in their 401(k) or 403(b) plan. These lawsuits have generally targeted larger plans, such as Delta Air Lines, Wells Fargo, and others,  but the fiduciary standards cited apply equally all sized  retirement plans.  

Because employers want to avoid 401k litigation, which could result in personal liability for fiduciaries, many plan sponsors  are looking for  ways to manage the risks associated with serving as a fiduciary.  Specifically, retirement plan committees always seem to search for  help to mitigate the risks that arise from selecting and monitoring their plan’s investment lineup.  Many of our consultants get asked, "What does it mean to hire a 3(38) Advisor / Investment Fiduciary?" and "How does that differ from a 3(21) Advisor / Investment Fiduciary?" Delegating control of a 401k plan’s investment lineup to an “Investment Manager,” as defined by section 3(38) of ERISA, can be one of the easiest and most effective ways an employer can minimize their liability for poor investment selection and monitoring decisions.

A dive into What it means to hire a 3(38) Investment Advisor.png

What's  the “Prudent Expert” Standard?

401(k) & 403(b) fiduciaries are held to an extremely high standard— the “prudent expert” standard. Under this standard, a plan fiduciary must act: “. . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use . . .”

ERISA’s standard of prudence for fiduciaries is not that of a prudent layperson, but rather that of a prudent investment professional. Many would agree that it doesn't seem  fair for managers of unrelated business activities to be judged on having equivalent expertise to a seasoned investment manager.  A lack of familiarity with investments is no excuse. If fiduciaries are unsure what to do, they are expected to retain professional advisors to make recommendations.  

 So what are the two levels of investment advisors  that are used by 401(k) retirement plan committees? We put together this handy chart below to help decipher between the two levels.   

3 (21) - Co-fiduciary


3 (38) – Co-fiduciary

Investment Advisor


Investment Manager (discretionary)

Assists in drafting IPS


Drafts IPS

Helps design plan menu


Designs plan menu

Recommends changes


Makes changes

Recommends fund mapping


Provides fund mapping

A key point in the table is authority where the retirement plan fiduciaries give up decision making authority to the investment advisor underneath the 3 (38) advisor model.  Our team jokes that the difference is akin to hiring a pilot to fly your plane for you, or having a lead pilot with several picked passengers all at once controlling the plane.  Many retirement plan committees prefer to utilize the 3 (21) advisor model as they just are not comfortable giving up all investment decisions to a third party.  

It should also be noted that by hiring a 3 (38) Investment Advisor , the plan  fiduciaries are not completely absolved from the investment decision liability.  Plan fiduciaries still have a  duty to properly oversee all  vendors hired to work on the plan, including monitoring and selecting the 3 (38)  Advisor.  A good rule of thumb to consider:  Fiduciaries don’t get sued for investment performance, they get sued for imprudent investment selection.

Also, if you have more questions about your fiduciary responsibility, please  download our free Fiduciary Responsibility Guide eBook from the link below.

Download Here


Other recent blog posts you may enjoy:

3 Savvy Ways to Improve your 401(k) Investment Menu Design

Top Rookie Mistakes When Evaluating your 401(k) & 403(b) Target Date Funds

The Question No One Asks About Stable Value Funds


Topics: Retirement Plan Menu Design, Investments