What Is a 3(38) Fiduciary and What Do They Do?
Explore the critical function of a 3(38) fiduciary in retirement plan investment management and the delegation of oversight.
A 3(38) fiduciary is a specific type of investment manager for retirement plans, operating under the Employee Retirement Income Security Act (ERISA) of 1974. This designation signifies a significant delegation of investment management responsibility from the plan sponsor to a qualified third party. The primary function of a 3(38) fiduciary is to assume discretionary authority over the selection, monitoring, and replacement of plan investments. This arrangement allows plan sponsors to transfer much of the direct investment-related liability, focusing instead on other aspects of plan administration.
Understanding the 3(38) Fiduciary Designation
A 3(38) fiduciary is an investment manager authorized to make investment decisions for a retirement plan without requiring prior approval from the plan sponsor. This designation is rooted in Section 3(38) of ERISA, which permits the delegation of investment management responsibility for a retirement plan’s assets. This legal framework provides a mechanism for plan sponsors, who may lack specialized investment expertise, to outsource complex investment oversight to a professional.
Only specific entities are eligible to serve as a 3(38) fiduciary: registered investment advisers (RIAs), banks, or insurance companies. RIAs must be registered under the Investment Advisers Act of 1940 or similar state law. These entities must also formally acknowledge their fiduciary status in writing to the plan sponsor, accepting the legal obligations associated with the role.
The core significance of the 3(38) designation lies in its ability to relieve the named fiduciary, typically the plan sponsor or employer, of direct liability for the specific investment decisions made by the 3(38) fiduciary. While the plan sponsor remains responsible for prudently selecting and overseeing the 3(38) fiduciary, their direct involvement in investment management is substantially reduced.
This delegation has profound legal implications for the plan sponsor, shifting the burden of investment management responsibility to the appointed 3(38) entity. The 3(38) fiduciary becomes accountable for the investment lineup, including determining the mix of funds offered and when changes are needed. This arrangement can mitigate potential legal exposure for plan sponsors related to investment performance or fee-related claims, as the 3(38) fiduciary assumes direct fiduciary liability for the functions they perform.
Responsibilities and Scope of Authority
Once designated, a 3(38) fiduciary undertakes comprehensive responsibilities regarding the retirement plan’s investments. Their primary duty involves exercising full discretionary authority and control over the selection, retention, and removal of investment options available to plan participants. This includes making all necessary investment decisions for the plan, such as choosing specific funds, asset classes, and making timely adjustments based on market conditions or strategy.
A 3(38) fiduciary is legally required to act prudently and solely in the interest of plan participants and beneficiaries. This obligation includes diversifying investments to minimize the risk of large losses, aligning with ERISA’s standards of conduct. They must also ensure that the plan’s investment options are appropriate and that there are sufficient options to allow participants to achieve proper diversification.
The ongoing monitoring of investment performance is a continuous responsibility for the 3(38) fiduciary. They must regularly evaluate the plan’s investment lineup and ensure compliance with the plan’s investment policy statement (IPS). Even if the 3(38) fiduciary helped create the IPS, they are bound to follow its guidelines, making changes to the investment menu as dictated by the policy.
Furthermore, 3(38) fiduciaries must make investment decisions independently and without conflicts of interest. They are also responsible for reporting requirements to the plan sponsor, providing detailed investment performance reports and documenting their decisions.
The scope of their liability is direct and substantial. While the plan sponsor retains the overarching duty to select and monitor the 3(38) fiduciary, the day-to-day investment decision-making and the associated liability for those decisions rest squarely with the appointed 3(38) entity.