The Employment Retirement Income Security Act (ERISA) outlines the rules for employee benefit plans, including the different types of fiduciaries associated with these plans. ERISA distinguishes between 3(21) fiduciaries, who are investment advisors, and 3(38) fiduciaries, who are investment managers. Each one plays an important, but unique, role in the administration of workplace benefit plans.
Ready to grow your client base? SmartAdvisor helps bring leads to you.
ERISA section 3(21) offers a definition of what it means to be a fiduciary. Under ERISA rules, fiduciaries include those who:
- Make decisions regarding plan management or its investments
- Make decisions about plan administration
- Is paid to provide investment advice to a plan
Fiduciaries are obligated to follow certain ethical guidelines with regard to how they conduct themselves. First and foremost, fiduciaries are expected to act in the best interests of plan participants and beneficiaries. They’re required to act prudently and diversify plan investments to minimize risks while following governance rules for the plan. Lastly, they must avoid conflicts of interest with the plan.
Individuals other than those who work with qualified retirement plans can be considered fiduciaries. For example, a trustee who oversees a trust on behalf of a grantor and one or more beneficiaries is also required to follow a fiduciary duty.
What Is a 3(21) Fiduciary?
A 3(21) fiduciary is an investment advisor. They provide advice to the plan sponsor but don’t make any decisions themselves about which investments are included in the plan.
Plans may task a 3(21) advisor with drafting an investment policy statement for the plan or revising an existing one. This document outlines the types of investments the plan offers and any internal processes for monitoring investments. A 3(21) advisor may offer suggestions for replacement investments if those are deemed necessary to fulfill the plan’s objectives.
The plan sponsor may ask a 3(21) advisor to take part in strategic meetings to review plan investments and offer suggestions regarding changes that may benefit the plan. However, the advisor would not have the authority to make those changes themselves. Instead, the plan sponsor would have the final say on whether to follow the advisor’s recommendations.
What Is a 3(38) Fiduciary?
A 3(38) fiduciary is an investment manager. A 3(38) fiduciary has the authority to make changes to the plan’s investment choices.
In terms of what else a 3(38) fiduciary does, their duties are similar to those of a 3(21) fiduciary. They can review the plan’s investments, monitor them and report back to the plan sponsor. The biggest difference is that a 3(38) fiduciary can go a step further and change the plan investments.
By law, 3(38) fiduciaries must be banks, insurance companies or registered investment advisers (RIAs). An RIA may register with federal or state regulatory agencies, depending on the amount of assets they have under management.
3(21) vs. 3(38) Fiduciary Key Differences
The main difference between a 3(21) and 3(38) fiduciary is that the former offers investment advice while the latter can offer advice and implement it through plan changes. Employee benefit plans may choose to hire one or both to share fiduciary duties.
If the plan hires a 3(21) fiduciary only, the company fiduciary would still be responsible for making the final decisions on what happens with plan investments. They could follow some of the advice the 3(21) fiduciary advisor offers or disregard all of it. Either way, the company fiduciary is solely responsible for the performance and fees of plan investments.
In a 3(38) fiduciary arrangement, more of the responsibility and liability associated with plan management shifts to the investment manager. The plan sponsor is still responsible for monitoring the investment manager, but they effectively transfer some of their own liability to them. That’s important, should the plan be sued by its participants because of underperformance or excessive fees.
Any individual or entity chosen to fulfill a 3(38) fiduciary role must be properly selected and appointed. That’s the duty of the plan sponsor and it prevents them from absolving themselves of liability entirely.
How to Become an Investment Advisor vs. Investment Manager
If you’re interested in pursuing a career in the retirement plan advisory space, it helps to know what you can expect. When hiring 3(21) and 3(38) fiduciaries, plan sponsors may have a specific checklist of things they look for in candidates.
For instance, investment advisors may need to have:
- 5 or more years of experience in a qualified retirement plan
- Series 6, 7, 65 or 66 licenses
- A bachelor’s degree in finance, accounting or a related field
- Hard and soft financial advisor skills, including communication skills and solid attention to detail
If you’re interested in taking on a 3(38) fiduciary role, you’d first need to become an investment advisory representative (IAR) of a registered investment advisor. That includes obtaining a Series 65 license. You might also pursue professional certifications or designations to enhance your credentials.
The next and critical step is registering with either the Securities and Exchange Commission or your state regulatory agency. Again, which one you register with is determined by the amount of assets you have under management. Larger firms may be required to register with the SEC while smaller firms may be able to choose between state and federal registration.
Both 3(21) and 3(38) fiduciaries can assist employee benefit plan sponsors in carrying out their duties. The main thing to remember is that the scope of their respective duties and the associated liability that goes along with them are not the same.
Tips for Growing Your Advisory Business
- Starting an RIA firm is an ambitious goal and one of the biggest challenges you may encounter is gaining traction in the online space. Having a website and social media accounts can help to increase your visibility but building an audience can take time. If you’re ready to accelerate your efforts to grow your client list, an online lead generation tool can help. With SmartAdvisor, for instance, you can get leads in your inbox, leaving you free to focus on other aspects of growing your business.
- Professional certifications are not necessary to become an RIA, though there can be some advantages to having them. For example, becoming a certified financial planner or chartered financial consultant could lend you credibility and underscore your knowledge. That could help attract prospective clients who are looking for a reputable advisor for your business.
Photo credit: ©iStock/MixMedia, ©iStock/Renata Hamuda, ©iStock/svetikd