3(21) vs 3(38) fiduciary is one of the biggest calls you make under ERISA. A 3(21) advisor gives advice. You keep the final say and share the risk. A 3(38) manager takes control of the fund choices. That risk moves off your plate.
3(21) vs 3(38) fiduciary is the most consequential advisor relationship decision a plan sponsor makes under ERISA. A 3(21) advisor serves as a co-fiduciary, recommending investments while the plan sponsor retains final authority and shared liability. A 3(38) investment manager takes full discretionary control, and the plan sponsor’s liability for investment decisions transfers when the delegation is done correctly.
Many plan sponsors do not learn the difference until something goes wrong. A participant files a complaint. A Department of Labor audit surfaces gaps in fiduciary documentation. A fund selection gets challenged and the sponsor realizes they have been personally on the hook for every investment decision their plan has made. The fiduciary liability that comes with managing plan investments without the right structure can reach well beyond the plan itself. At that point, the distinction between a 3(21) co-fiduciary and a 3(38) investment manager stops being abstract.
This page walks through what each ERISA fiduciary designation means, what liability transfers when you hire each, and the practical question of when the added cost of a 3(38) is actually worth it for your plan. Understanding workplace retirement plan optimization starts here, because your fiduciary structure is the foundation everything else is built on.
What Is a 3(21) Fiduciary?
A 3(21) co-fiduciary is an investment fiduciary who shares fiduciary responsibility with the plan sponsor but does not take discretionary control over investment decisions. The name comes from ERISA Section 3(21), which defines who qualifies as a fiduciary under the law.
In practical terms, a 3(21) advisor reviews your fund lineup, benchmarks your costs, and provides investment advice in the form of specific investment recommendations. But the final call stays with you. You retain the authority to accept or reject any recommendation, and because you retain that authority, you retain the corresponding liability. If a fund recommendation turns out badly for participants, both you and your advisor may bear responsibility for the decision.
What a 3(21) relationship does well is bring independent expertise into the process. Many plan sponsors are business owners, CFOs, or HR directors who are expert at running their company but not at evaluating investment menus or ERISA compliance requirements. A qualified 3(21) advisor provides a documented, defensible process that can demonstrate the sponsor followed a prudent procedure, even if outcomes were imperfect. For plan fiduciaries, that documentation is often the difference between surviving a DOL inquiry and losing one. Reducing fiduciary risk through a structured advisory process is one of the core reasons sponsors engage a 3(21) in the first place.
The 3(21) structure also tends to carry a lower cost than a full discretionary arrangement, which makes it a reasonable fit for smaller plans or sponsors who want advisory support without fully stepping back from investment oversight.
What Is a 3(38) Fiduciary?
A 3(38) fiduciary, formally defined under ERISA 3(38) (Section 3(38) of the Employee Retirement Income Security Act), is an investment manager who takes on discretionary authority over the plan’s investment decisions. This is the more complete transfer of responsibility available under ERISA, and it is the one many plan sponsors actually want once they understand the exposure they have been carrying.
When you hire a qualified 3(38) investment manager and the delegation is documented correctly, your liability for those investment decisions shifts. You are no longer personally responsible for every fund in the lineup. You are responsible for the decision to hire the manager and for monitoring whether the manager continues to be qualified, but the day-to-day investment authority belongs to the manager.
That transfer is not automatic. Under ERISA, only a registered investment adviser (the statutory term used in the law), bank, or insurance company can hold the 3(38) designation. The appointment must be in writing. The delegation language in your plan documents and advisor agreement must be precise. Sponsoring a plan and verbally agreeing that your advisor handles investments does not create a valid 3(38) relationship. Done incorrectly, the liability stays with the sponsor regardless of what either party intended.
The 401(k) and workplace plans fiduciary structure is not a set-it-and-forget-it exercise. A 3(38) investment manager is held to the ERISA standard of acting in the interest of plan participants, but that obligation runs alongside your continuing duty to monitor. Even with a properly appointed 3(38), you still owe ongoing monitoring of the advisor: reviewing performance, confirming continued qualification, and documenting that review process. The 3(38) removes investment liability. It does not remove your obligation as a plan sponsor to monitor who you hired.
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How the Liability Shift Actually Works Under 3(38)
The liability transfer that comes with a proper 3(38) relationship is real, but it is conditional. Plan sponsors who assume they are protected simply because they hired an advisor are often wrong. The protection depends on three things: the advisor’s qualification, the written documentation of the delegation, and the sponsor’s ongoing monitoring.
Advisor qualification. Under ERISA, only a registered investment advisor (RIA), bank, or insurance company can serve as a 3(38) investment manager. An advisor who lacks RIA status cannot legally accept 3(38) delegation, and any agreement purporting to transfer fiduciary responsibility to an unqualified party does not actually transfer anything. The sponsor remains liable.
Written delegation. The appointment must be explicit. A general advisory agreement that references investment guidance is not a 3(38) delegation. The agreement must specifically state that the advisor accepts fiduciary status as a 3(38) investment manager under ERISA and has discretionary authority over the plan’s investment lineup. That language matters, and the absence of it negates the protection.
Ongoing monitoring. Even after a valid 3(38) relationship is in place, the plan sponsor retains one fiduciary obligation: the duty to monitor the manager. This means reviewing whether the manager remains qualified, whether investment performance is being managed appropriately, and whether the fee arrangement remains reasonable. The 3(38) eliminates liability for individual fund decisions. It does not eliminate the sponsor’s responsibility to confirm that the person making those decisions is still the right person to be making them.
For plan sponsors working with a 401(k) rollover strategy advisor or considering a change in plan advisor, this is also the right moment to clarify the fiduciary structure of any incoming relationship. Not every advisor offers 3(38) status, and many do not disclose the distinction proactively.
When Does the Added Cost of a 3(38) Make Sense?
The 3(21) vs 3(38) cost question comes up in almost every plan sponsor conversation once they understand the liability implications. A 3(38) relationship typically carries a higher fee than a 3(21) advisory arrangement, and for some plans, that cost difference is a real consideration.
The answer depends less on plan size than it does on the sponsor’s circumstances. A few situations where the cost of a 3(38) relationship tends to be worth it:
The plan sponsor has significant personal exposure. Business owners and executives who sponsor 401(k) plans often have personal assets that could be reached in the event of a fiduciary breach. For sponsors in that position, the cost of a proper 3(38) relationship is a form of liability insurance that also happens to improve the quality of investment oversight for participants.
The plan sponsor has limited investment expertise. A CFO with a strong accounting background may still have limited fluency in evaluating fund performance, benchmarking expense ratios, or managing a fund replacement process. When the sponsor is genuinely not qualified to evaluate investment decisions, retaining that authority under a 3(21) structure means retaining liability for decisions the sponsor is not equipped to make. That is the worst of both worlds.
The plan has had compliance issues. A plan that has received DOL inquiry letters, experienced participant complaints, or gone through a fiduciary audit already knows what it feels like to be in the crosshairs. For those plans, strengthening the fiduciary structure is not a cost-benefit calculation. It is a remediation priority.
The employer’s primary interest is running their business. Many plan sponsors did not become business owners to manage investment menus. The time they spend on plan administration is time not spent on the business. A properly structured 3(38) relationship allows the sponsor to delegate investment decisions to a qualified manager and focus on what actually drives the business forward. That is a different kind of ROI, but it is real.
What Plan Sponsors Get Wrong About 3(38) Liability Protection
The most common misunderstanding is that hiring a 3(38) investment manager makes the plan sponsor a passive bystander. It does not. ERISA does not allow a plan sponsor to simply hand off a plan and walk away. The 3(38) liability protection is specifically limited to investment decisions. All other fiduciary duties remain with the sponsor.
Fee reasonableness is still a sponsor obligation. A 3(38) manager selects and manages investments, but the plan sponsor is still responsible for ensuring that the total cost structure of the plan, including advisor fees, recordkeeping fees, and fund expenses, is reasonable relative to the services received. This is evaluated under the 408(b)(2) fee disclosure requirements, which require service providers to disclose their compensation. It is a separate fiduciary inquiry from investment selection, and it is one of the fiduciary responsibilities that never transfers under any advisory arrangement.
Participant education and plan design are not transferred. These decisions include whether the plan offers auto-enrollment, what the default deferral rate is, whether there is an employer match and how it vests, and what investment options are available to participants. These are plan design decisions that remain with the employer and the plan document. A 3(38) investment manager selects among the investment options. They do not set the plan structure.
Monitoring is the sponsor’s permanent duty. As noted above, even with a properly structured 3(38) relationship, the plan sponsor remains responsible for confirming that the manager continues to be qualified and that the relationship is being managed appropriately. Quarterly or annual committee meetings, documented in plan committee minutes, are the standard expectation. That ongoing due diligence is also where the sponsor evaluates whether the 3(38) arrangement continues to serve plan participants well relative to available alternatives.
Many plan sponsors underestimate how interconnected the fiduciary obligations are across tax-efficient investment strategy, plan design, and cost management. The 3(38) designation addresses one critical piece of a larger fiduciary picture.
How HCM Approaches Plan Sponsor Fiduciary Relationships
Holland Capital Management works with plan sponsors as a fiduciary advisor with the credentials and registration to provide fiduciary services under either a 3(21) or 3(38) structure. HCM works with defined contribution plans across a range of recordkeeper platforms, and the investment management process is built around the same institutional principles applied to individual client portfolios. The conversation always starts with what level of involvement and liability allocation is appropriate for the plan sponsor’s situation, not with a standard product recommendation.
For many plan sponsors, the right answer is a properly documented 3(38) relationship. The sponsors who benefit most are business owners who are highly competent at running their company but have no desire to be responsible for evaluating a fund lineup under ERISA. Offloading fiduciary responsibility for investment decisions to a qualified manager lets them focus on what they do best while their employees’ retirement accounts are managed by someone who is accountable for every investment decision made on the plan’s behalf.
The broker of record relationship is the starting point. Becoming broker of record on the plan allows an advisor to implement the fiduciary structure correctly, conduct an independent fee benchmarking process, and evaluate whether the current investment lineup is serving participants well. From that foundation, a sponsor and advisor can weigh whether a 3(21) advisory relationship or a full 3(38) discretionary arrangement is the better fit, and the decision and rationale are documented either way.
For plan sponsors who also have high-balance participants considering their individual wealth options, the same relationship opens the door to individual portfolio management through a Self-Directed Brokerage Account within the plan. That structure gives participants access to a professionally managed investment allocation without requiring a rollover out of the plan. That is a downstream conversation, not the lead. The lead is always the plan sponsor’s fiduciary situation and whether it is as well-protected as it should be.
Preserve. Strengthen. Grow.™ is how HCM approaches every client relationship, including plan sponsors. Preserve the plan’s fiduciary integrity. Strengthen the investment process. Grow the participant outcomes over time. That sequence matters as much in a 401(k) context as it does in individual wealth management, and it is how HCM builds investment portfolios at every level of the client relationship.
Is There a Difference Between 3(38) and Discretionary Investment Manager 401(k)?
No material difference. Discretionary investment manager 401(k) is the plain-language description of what a 3(38) fiduciary does. The 3(38) designation is the ERISA statutory reference, and the term discretionary investment manager describes the functional role: an investment manager who exercises full discretion over the plan’s investment selections without requiring plan sponsor approval for each change. Both terms refer to the same role. In practice, you will hear both used interchangeably by advisors and compliance professionals, but the governing standard is ERISA Section 3(38).
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Frequently Asked Questions About 3(21) vs 3(38) Fiduciary
What Is the Main Difference Between a 3(21) and 3(38) Fiduciary?
A 3(21) co-fiduciary advises the plan sponsor and shares investment responsibility, but the sponsor retains final authority over fund decisions and the associated liability. A 3(38) investment manager takes on full discretionary authority over the plan’s investment decisions, and when the delegation is properly documented, the plan sponsor’s liability for those specific investment choices transfers to the manager. Both relationships require written agreements and ongoing monitoring by the sponsor.
Does Hiring a 3(38) Fiduciary Eliminate All Plan Sponsor Liability?
No. A properly documented 3(38) relationship transfers liability for investment decisions to the manager, but the plan sponsor retains responsibility for monitoring the manager, ensuring overall plan fees are reasonable, overseeing plan design, and managing participant education. The 3(38) designation is investment-specific. All other ERISA fiduciary duties remain with the plan sponsor. Sponsors who assume they are fully protected without understanding these continuing obligations may still face exposure in a DOL inquiry or participant claim.
Who Can Legally Serve as a 3(38) Investment Manager?
Under ERISA, only a registered investment advisor (RIA), bank, or insurance company can be appointed as a 3(38) investment manager. The appointment must be in writing, and the agreement must explicitly state that the advisor accepts fiduciary status with discretionary investment authority over the plan. An advisor who lacks RIA registration cannot legally hold 3(38) status, and any agreement attempting to transfer fiduciary responsibility to an unqualified party does not create valid liability protection for the sponsor.
How Much Does a 3(38) Fiduciary Advisor Typically Cost?
The 3(38) advisor fee varies by the size of the plan, the scope of services, and the advisor’s fee structure. Larger plans tend to negotiate lower basis-point fees, while smaller plans may pay a flat annual fee. In general, a discretionary 3(38) arrangement carries a higher cost than a 3(21) advisory relationship because the advisor is accepting a broader fiduciary responsibility. The relevant comparison is not the advisory fee in isolation but the total cost relative to the fiduciary protection and investment oversight being provided. For plan sponsors with meaningful personal exposure, the 3(38) cost is often a reasonable form of liability management. Learn more in the workplace retirement plan optimization guide.
What Documentation Is Required to Establish a Valid 3(38) Relationship?
At minimum, the advisory agreement must explicitly state that the advisor accepts fiduciary status as an investment manager under ERISA Section 3(38) and that the advisor has been granted discretionary authority over the plan’s investment menu. The plan documents, including the Investment Policy Statement, should reflect the 3(38) delegation. Plan committee minutes should document the appointment decision, the rationale for the selection, and the ongoing monitoring process. A verbal agreement or generic advisory contract that does not reference 3(38) status does not create valid protection.
Can a Plan Sponsor Switch from a 3(21) to a 3(38) Advisor?
Yes. A plan sponsor can change the structure of the advisor relationship at any time, subject to any contractual notice requirements in the existing advisory agreement. The process involves documenting the decision to upgrade to a 3(38) arrangement, confirming the incoming advisor’s RIA status and willingness to accept 3(38) status, and updating the advisory agreement and plan documents accordingly. Plan sponsors considering this change often do so in conjunction with a broader plan review, including fee benchmarking and fund lineup evaluation, which is a natural starting point for a new advisor relationship.
Does the Type of Fiduciary Advisor Affect What Investment Options Are Available in the Plan?
The fiduciary designation itself does not determine what investments are available. The plan’s recordkeeper, fund platform, and plan document govern the menu of available options. However, a 3(38) investment manager with full discretionary authority tends to take a more active role in curating and maintaining the fund lineup, which may result in a more deliberate selection process and more consistent fund replacement when performance or cost issues arise. Plan sponsors interested in expanded investment options for high-balance participants, such as a Self-Directed Brokerage Account, should ask any prospective advisor about that capability as part of the advisor selection conversation. You can also read more in our 401(k) Fiduciary Oversight guide.
