Are you in charge of selecting the investments in the 401(k)? Or have you outsourced the investment management of your company’s plan to a third party? If you have, are you sure that your provider has taken on full responsibility for your plan’s investments? If you have an investment adviser who is acting as a 3(21) fiduciary, you may be surprised to learn that you are ultimately responsible for the investment decisions.

Ok, let’s back up a bit.

As the IRS explains on its website, “Many of the actions needed to operate a qualified retirement plan involve fiduciary decisions – whether you hire someone to manage the plan for you or do the plan management yourself.” And when it comes to handling the plan’s assets, or using discretion in managing the plan, that person or entity is a plan fiduciary.

You can certainly delegate the investment management aspects of your company’s 401(k). For example, you can hire an investment advisor to help select investments and make recommendations. This is the job description for a Section 3(21) fiduciary. A 3(21) fiduciary is a co-fiduciary. That means the employer is still responsible for making the final investment decisions, and bears liability for those decisions.

Contrast this relationship with 3(38) fiduciary. When you hire a 3(38) investment adviser, you are hiring a third party to make all of the investment decisions and to take responsibility for them. They have full discretion and full liability. This relieves the company of much of its liability pertaining to the 401(k) plan’s investments.

When you hire a 3(38), you aren’t presented with fund recommendations that you must ultimately approve. The 3(38) fiduciary selects and monitors the funds, even removing managers when necessary. Unlike the 3(21), the 3(38) bears the investment risk.

When it comes to hiring a 3(21) co-fiduciary, the sharing of liability and investment responsibility may not be emphasized, or perhaps hardly mentioned. That’s why it’s important to understand exactly what sort of relationship you are entering into with any third-party investment advisor.

Selecting your investment fiduciary

Earlier we mentioned that you can outsource much of the liability associated with 401(k) investments. So what responsibilities will you retain? Good question! It’s your responsibility to select your 3(38) fiduciary in a prudent manner.

Here again, the IRS website provides some items to consider when hiring someone to manage your plan. For example, you’ll need to gather information about the firm’s affiliations, financial condition, and experience with 401(k) plans. Have them provide a description of typical investments and the proposed fee structure.

Once hired, you’ll want to review the provider’s overall performance to see if services were provided as promised. And compare the actual fees charged to what was quoted. You’ll want to review the investment performance and read any reports they provide. Also any complaints from participants should be investigated.

While a 3(38) fiduciary can take investment related tasks and liability off of your plate, some companies may actually prefer a 3(21) fiduciary. For example, if your company has a group of managers with the time and interest to select and monitor investments, then a 3(21) fiduciary could be a good fit for your company’s plan. This may be the case for some large companies, but does your small business have that luxury? More likely, your team wants to remain focused on running the business rather the plan’s investments.

Key differences between a 3(21) fiduciary and a 3(38)

Just to recap 401(k) investment fiduciary options, here’s a quick table that compares the 3(21) to the 3(38) head on.

**3(21) Fiduciary****3(38) Fiduciary**
**Co-fiduciary** (i.e. is liability shared?)Yes. You and the 3(21) are liable for the investments.No. The 3(38) bears all liability for the plan’s investments.
**What are you liable for as the plan sponsor?**Investment menu and performance.Proper due diligence during selection of an outsourced fiduciary.
**What is the outsourced Fiduciary responsible for?**Recommending the investment menu.  May provide some ongoing reporting around fund performance.Selection of the investment options.  Ongoing monitoring and review of investment options selected..

There’s investments and then everything else

Okay, so you’ve figured out who will construct your fund lineup. But who is responsible for the day to day operation of the plan, and the key administration functions like reviewing and signing the IRS Form 5500?

If you are still in charge of the Form 5500, along with tracking who’s eligible to join the plan, and maintaining all relevant plan records, that’s a lot of time and energy spent not running your business. If that’s the case, you may want to consider hiring a 3(16) fiduciary.

An outsourced 3(16) fiduciary can handle many administrative functions for you, like processing hardship withdrawals or 401(k) loans, and sending required participant notices and disclosures.

At ForUsAll we believe plan sponsors should not be at risk of making compliance errors or spending huge amounts of time and energy on plan administration work just to provide a retirement plan. We offer 3(16) fiduciary services on all of our plans, no matter the size. ForUsAll manages everything from the day-to-day operations on your plan to the signing of the Form 5500 on your behalf. Thanks to our proprietary technology and compliance expertise, we can virtually eliminate the administrative risk and work that comes with offering a 401(k) plan.

And when it comes to investments, we can act as your independent advisor and 3(38) fiduciary. We select and monitor the investment options in your 401(k), and put in writing the liability we assume when taking on this task.

So, if you are trying to decide between a 3(21) and a 3(38) fiduciary, or longing for the administrative help a 3(16) fiduciary can provide, talk to us today about the right level of fiduciary coverage for your plan.