What Is a 3(38) Fiduciary?

Most tax-advantaged retirement accounts are defined by ERISA, the “Employee Retirement Income Security Act.” This statute outlines how programs like 401(k)s work, including the laws around how those accounts operate, and defines three main types of financial advisors. These are known as 3(16), 3(21) and 3(38) fiduciaries, after the sections of the statute that define each category. A 3(16) fiduciary actively administers the 401(k) plan, meaning that he or she handles paperwork, enrollment, distributing information and other similar functions. A 3(21) fiduciary gives the plan investment advice. A 3(38) fiduciary manages the 401(k), which means selecting which investments to make and conduct the actual transactions. Here’s what you need to know about a 3(38) fiduciary.

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A 3(38) fiduciary, sometimes known as an ERISA 3(38) fiduciary or a 3(38) investment manager, is a financial professional who manages the portfolio of a 401(k) account.

The role of a 3(38) fiduciary is defined by the ERISA statute, which broadly governs most tax-advantaged retirement accounts in the United States. The name comes from section 3(38) of the statute, which defines this particular job.

A 3(38) fiduciary manages the 401(k)’s investment portfolio. They have the broadest scope of authority over the 401(k) plan because the 3(38) fiduciary is the individual or institution running the portfolio. They can access the account’s funds, select which investments to make, buy and sell assets, establish a long-term strategy and otherwise independently make decisions for this account.

Due to their broad scope of authority, 3(38) fiduciaries must be registered investment advisors. This means the role is generally limited to a bank, brokerage, insurance company or other similarly situated institution.

A 3(38) fiduciary overlaps with 3(16) and 3(21) fiduciaries but these other roles have limited authority over a 401(k) account. The 3(16) fiduciary oversees the account’s administration. This means that they generally have no role in the portfolio’s investment decisions. Rather they handle the paperwork, disclosures, payments and similar activities necessary to run the account. A 3(21) fiduciary recommends specific investments and strategies for the 401(k) plan to take, but cannot execute those trades themselves. The 3(38) fiduciary makes the final decision on all trades and has access to the account’s assets in order to execute those decisions.

What Are the Duties of a 3(38) Fiduciary?

A 3(38) fiduciary is responsible for managing the assets in a 401(k) and for handling its transactions. They have the power to spend the plan’s money, buy and sell specific assets, manage specific positions and holdings, and take all other actions necessary to oversee the portfolio’s investments.

The 3(38) fiduciary must make these decisions according to the employer, or plan sponsor’s, wishes. Generally this means that the employer will decide on an overall strategy for the 401(k) plan and the 3(38) fiduciary will manage the portfolio’s investments accordingly. It’s common for larger employers to have a series of possible 401(k) portfolios with different investment strategies, in which case the 3(38) fiduciary will manage each portfolio by its specific strategy. Like a 3(21) fiduciary a 3(38) manager can find individual assets and investments but, unlike with a 3(21) fiduciary, a 3(38) fiduciary does not need to seek anyone’s approval for specific investments.

The main limit to a 3(38) fiduciary’s authority is set by the plan’s sponsor. As with all portfolio managers, 3(38) fiduciaries have to follow the written instructions of their client. Usually the client will issue broad requirements, choosing an overall strategy or asset mix based on their risk/reward balance. However a client can make written instructions as specific as they want. For example, clients may instruct their 3(38) fiduciaries not to invest in a specific company. In that case, even if the 3(38) manager thinks the company would be a good investment, they must follow client instructions.

A 3(38) fiduciary can advise the client when his or her judgment conflicts with the client’s written instructions, for example suggesting that the client change strategies or consider a restricted asset, but they have to follow the client’s final decision.

All 3(38) fiduciaries must be named in writing and the fiduciary must confirm their appointment in writing.

As with all professions, a fiduciary has both a legal and an ethical obligation to act in the best interests of their client. While this is a broad requirement, the most important elements include an obligation to:

Follow their client’s instructions at all times;
Make decisions that are, by the fiduciary’s best professional judgment, in the client’s best interest;
Only act on the client’s behalf and never make investments or recommendations based on the fiduciary’s best interest;
Avoid conflicts of interest whenever possible and always disclose a conflict in writing to the client;
Meet an objectively reasonable standard of professional competence.

It’s important to understand that these requirements don’t mean that the fiduciary has to always be right or give the absolute best possible advice. It just means that they can’t try to enrich themselves with the client’s money. They have to communicate with their client, and they have to act with a general professional competence. A 3(38) fiduciary can get a stock pick wrong, for example. That happens to everyone. It would be a breach of their duty, however, to choose a mutual fund based on which ones give the fiduciary a commission.

Fiduciary duties are heavily enforced. If an employer or an employee thinks that their 401(k) plan’s 3(38) fiduciary has broken the rules they can file a lawsuit or an ethics complaint. Penalties can range from financial damages to stripping the 3(38) fiduciary of their professional license.

The Bottom Line

A 3(38) fiduciary manages the portfolio for a 401(k) plan. This person has the authority to buy and sell assets, make strategic decisions and otherwise handle all aspects of the account’s investing. The duties of this kind of fiduciary are outlined in the Employee Retirement Income Security Act, also known as ERISA.

Retirement Tips

The idea of a fiduciary is key to most professions from law to finance. Although it can seem dry and technical, fiduciary duties are actually here for your protection, and they’re essential.
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