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3(21) or 3(38): A Guide for Business Owners

retirement planning

 Matthew Baisden By: Matthew Baisden

Plancorp has worked with many business owners over the years to improve their corporate retirement plans. We have rarely come across a business owner who wanted more liability on their plate. Unfortunately, business owners frequently retain more than their fair share of legal liability—without even realizing it.

If your business has a qualified retirement plan such as a 401(k), the advisor for your plan can sign as one of two fiduciary statuses, either a 3(21) Co-Fiduciary or 3(38) Investment Manager according to ERISA law.  Only one of those statuses takes the legal liability of investment selection and monitoring for the retirement plan from the business owner and transfers it to the advisor.

Here’s a breakdown of the 3(21) and 3(38) advisor designations, as well as what you should know about each as a business owner.

3.21

What is a 3(21) Investment Advisor?

A 3(21) Investment Advisor is a “Co-Fiduciary” role. The advisor provides guidance to you regarding the investments offered within the retirement plan. Ultimately, a 3(21) Investment Advisor has no discretion over the investments in the plan. Because they have no discretion, you have not delegated any liability to them. That means even if you have hired an advisor, they may not have any legal responsibility for the investments offered in the retirement plan. The fiduciary risk and liability on investments still lies with you.

3.38-1

What is a 3(38) Investment Manager?

A 3(38) Investment Manager hired by you, the business owner, makes the investment decisions for the retirement plan. This 3(38) Investment Manager has discretion over the investments and can add or remove investment options. Plancorp signs as a 3(38) Investment Manager for our clients. When you retain a 3(38) Investment Manager, you delegate your responsibility for investment selection and monitoring to them allowing you to focus on growing your business.

 


Who can be a 3(38) Investment Manager?

Only a bank, insurance company, or Registered Investment Advisor (such as Plancorp) can serve as a 3(38) Investment Manager.

 bank  insurance  ria blck-1

Bank

 

Investment Company

 

Registered Investment

Advisor (RIA)

 

If a 3(38) Investment Manager has discretion, can they add and remove investments as they wish?

Yes, but that is not how we function at Plancorp. Before making any change to 401(k) investments, we talk with our clients about why the change is being made, how it will be made and the cost. Changes are not made without consulting our clients first. We also work with clients to prepare an Investment Policy Statement (IPS) which outlines the investment selection and monitoring process and how our Investment Committee makes decisons. Changes align with the framework set forth in this document which is reviewed at least annually.

How do I know if my advisor is a 3(21) or 3(38)?

Specifically ask your advisor if they have signed as a 3(21) Advisor or 3(38) Investment Manager. If they don’t answer directly, that is probably all the answer you need.

Do I have any liability for the retirement plan if I hire a 3(38) Investment Manager?

Yes, you still need to provide oversight of the advisor you hire to verify they are acting prudently. Other fiduciary liabilities related to retirement plans—such as making sure fees are reasonable, following the plan document and making timely contributions—continue to be held by plan fiduciaries and cannot be delegated to anyone else. A good consultant can help you understand and limit these risks, though. 

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With four years’ of portfolio management experience under his belt, Matt came to Plancorp in 2016 to join our Retirement Plan Advisors practice. He loves helping business owners build retirement plans that make their companies stronger and give owners the ability to retire when they want. More »

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