What Is a 3(38) Fiduciary and What Do They Do?
Discover the 3(38) fiduciary's critical role in retirement plans. Learn about their investment management, liability transfer, and key selection factors.
A “3(38) fiduciary” is an Investment Manager defined under ERISA Section 3(38) as having the discretion to make investment decisions for a retirement plan. This article explains the specific functions of this particular type of fiduciary and its significance for retirement plan sponsors.
Role and Responsibilities
A 3(38) fiduciary undertakes specific duties for a retirement plan, centered on investment management. They select, monitor, and replace investment options without requiring prior plan sponsor approval. This discretionary control allows them to adjust the investment lineup as market conditions or strategy dictate.
Their responsibilities include adhering to the plan’s Investment Policy Statement (IPS) and managing investments according to its guidelines. The IPS outlines the plan’s objectives, risk tolerance, and criteria for investment selection and monitoring. Continuous oversight of investment performance, fees, and adherence to fiduciary standards is a duty. They regularly evaluate investment options to ensure the plan lineup remains diversified and cost-efficient.
A 3(38) fiduciary is held to the highest fiduciary standard under ERISA. This mandates acting solely in the best interest of plan participants and beneficiaries. They must exercise the care, skill, prudence, and diligence that a prudent person would use in similar circumstances. Diligent record-keeping and documentation of all investment decisions are also responsibilities.
Transferring Fiduciary Liability
A key aspect of a 3(38) fiduciary relationship is the ability to transfer investment-related fiduciary liability from the plan sponsor. Under ERISA Section 405, a plan sponsor is relieved of liability for the acts or omissions of a properly appointed 3(38) Investment Manager concerning plan asset investment. This delegation provides protection for plan sponsors regarding investment decisions.
This transfer of liability applies to investment decisions like selection, monitoring, and replacement of investment options. The plan sponsor retains other fiduciary responsibilities, including prudent selection and ongoing monitoring of the 3(38) fiduciary. They must ensure the 3(38) fiduciary operates within reasonable fee structures and maintains overall plan administration compliance.
In contrast, a 3(21) fiduciary, while also providing investment expertise, offers advice and recommendations as a co-fiduciary rather than assuming discretionary control over plan assets. A 3(21) fiduciary does not relieve the plan sponsor of investment liability, as the final decision-making authority remains with the sponsor. The unique characteristic of the 3(38) role is its capacity to significantly reduce the plan sponsor’s direct investment liability by taking on discretionary management.
Selecting a 3(38) Fiduciary
When selecting a 3(38) fiduciary, plan sponsors must conduct thorough due diligence, as they remain responsible for this initial choice and ongoing oversight. Verifying the provider’s credentials and experience is an important step, looking for relevant certifications and a proven track record in managing retirement plan investments. Experience specific to ERISA-governed plans and an understanding of regulatory requirements are particularly valuable.
It is important to confirm that the provider will acknowledge their 3(38) fiduciary status in writing within the contract, clearly defining their discretionary authority over plan investments. Evaluating their investment philosophy and process is also necessary to ensure alignment with the plan’s objectives and the existing Investment Policy Statement. This includes understanding their approach to risk management and how they aim to meet or exceed investment benchmarks.
The fee structure and transparency of all associated costs are important considerations, ensuring they are reasonable for the services provided. Plan sponsors should also inquire about adequate fiduciary liability insurance, which protects the fiduciaries themselves against claims of breach of duty, and an ERISA fidelity bond, which protects the plan from losses due to fraud or dishonesty by those handling plan funds. Checking references and reviewing their performance history with similar plans can provide insights into their service model and communication practices.