What Is a 3(21) Fiduciary and Its Key Responsibilities
Explore the 3(21) fiduciary's specific function in retirement plan investment guidance. Learn how their advisory role impacts shared responsibilities and liability.
Fiduciaries play a significant role in managing retirement plans, such as 401(k)s, safeguarding the interests of plan sponsors and participants. The Employee Retirement Income Act of 1974 (ERISA) is the foundational law governing these relationships, establishing standards for those who manage retirement plan assets. This article clarifies the specific responsibilities and characteristics of a 3(21) fiduciary.
What Defines a 3(21) Fiduciary
A 3(21) fiduciary is an investment advisor who provides recommendations to a retirement plan, as defined by ERISA Section 3(21). This section specifies that a person becomes a fiduciary if they exercise any discretionary authority or control regarding plan management or asset disposition, or if they render investment advice for a fee. The 3(21) fiduciary operates as a “co-fiduciary” alongside the plan sponsor, sharing responsibility for the investment advice provided.
The distinguishing characteristic of a 3(21) fiduciary is their advisory capacity; they offer expert guidance but do not possess discretionary control over the plan’s assets or investment decisions. The plan sponsor retains the ultimate authority to accept or reject the advice provided by the 3(21) fiduciary. This means the plan sponsor remains responsible for the final decisions regarding the plan’s investments.
While the 3(21) fiduciary shares liability for the specific advice they render, the primary fiduciary responsibility for acting upon or disregarding that advice, and for the overall management of the plan’s investments, remains with the plan sponsor. The 3(21) fiduciary’s role is to inform and guide, not to unilaterally execute investment changes.
Key Responsibilities of a 3(21) Fiduciary
A 3(21) fiduciary’s responsibilities center on providing informed investment advice and guidance to the plan sponsor. They assist in selecting and monitoring the plan’s investment options, ensuring alignment with plan objectives and ERISA standards. This includes offering recommendations for the plan’s investment lineup, aiming for appropriate diversification and reasonable fees.
A 3(21) fiduciary often helps develop and periodically review the plan’s Investment Policy Statement (IPS). This document outlines the investment philosophy, criteria for selecting and monitoring investments, and procedures for making changes. The fiduciary monitors the performance of the plan’s investment options against established benchmarks, recommending adjustments as market conditions or fund performance necessitate.
These fiduciaries also educate the plan sponsor on their fiduciary duties and best practices related to investment selection and ongoing monitoring. They can assist in documenting investment decisions, which is important for demonstrating a prudent process in accordance with ERISA. The final decision-making authority and the ultimate responsibility for implementing those decisions rest squarely with the plan sponsor.
Comparing Fiduciary Roles
A 3(21) fiduciary provides non-discretionary investment advice, offering recommendations while the plan sponsor retains the final say and primary fiduciary responsibility for investment selection. This arrangement allows the plan sponsor to maintain control while benefiting from professional insights.
In contrast, a 3(38) fiduciary acts as a discretionary investment manager. This role grants them the authority to make investment decisions and manage plan assets without requiring explicit approval from the plan sponsor for each transaction. The 3(38) fiduciary assumes primary fiduciary responsibility for the investment decisions made, significantly reducing the plan sponsor’s liability.
The plan sponsor always retains overarching fiduciary duties, including the prudent selection and ongoing monitoring of any hired fiduciaries. A plan trustee holds responsibility for the custody of plan assets and executing transactions as directed, interacting with both 3(21) and 3(38) fiduciaries based on the scope of their authority.
Who Serves as a 3(21) Fiduciary
Financial professionals and entities commonly serve as 3(21) fiduciaries, providing expertise to retirement plans. These include financial advisors, investment consultants, and Registered Investment Advisers (RIAs).
Professionals in this role are expected to possess relevant qualifications, such as appropriate licenses, certifications, and substantial experience in retirement plan consulting. They must formally acknowledge their fiduciary status in writing, clearly outlining their role and responsibilities.