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A registered investment advisor

A 401(k) retirement plan fiduciary is a person who has the responsibility of managing the plan to the best interests of its participants. Federal law recognizes three types of 401(k) fiduciaries, 3(16), 3(21) and 3(38) fiduciaries. The names refer to the sections of the law describing their functions, with 3(16) fiduciaries overseeing administration of the plan, 3(21) fiduciaries making investment recommendations and 3(38) fiduciaries actually managing investments. Learn what each of these fiduciaries does.

All 401(k) plans have someone, either the plan sponsor or an administrator, acting as the 3(16) fiduciary. Most also have a financial professional acting as either a 3(21) or 3(38) fiduciary involved in investing the plan’s assets.

The duties of the different types of 401(k) fiduciaries are set out in the Employee Retirement Income Security Act (ERISA), a federal law enacted in 1974. Under ERISA, plan fiduciaries can be held liable for failing to fulfill their responsibilities. The law sets out reporting and disclosure requirements as well as practices for soliciting and enrolling participants and preparing an investment plan. These responsibilities are parceled out among the plan fiduciaries.

3(16) Fiduciaries

The duties of the 3(16) fiduciary center on administration of the plan. These functions include distributing summary plan descriptions, soliciting and enrolling members and fulfilling reporting requirements. The role of 3(16) fiduciary is often delegated to an outside vendor called a third-party administrator hired by the plan sponsor.

If there is no third-party administrator, the role of 3(16) fiduciary defaults to the plan sponsor. When the 3(16) fiduciary is a third party, it does not fully relieve the plan sponsor from liability for the operation of the plan in the participants. Having an outside 3(16) fiduciary will likely improve the plan’s compliance with the law. However, the sponsor is still responsible for choosing the third-party administrator and seeing that the responsibilities of the fiduciary are properly executed.

3(21) Fiduciaries

Pen resting on a 401(k) statement

The 3(21) fiduciary is a financial advisor to the plan. In exchange for a fee, the 3(21) fiduciary gives advice and makes recommendations about how the plan’s assets are to be invested. A 3(21) fiduciary may have a different level of involvement as an advisor, ranging from making limited recommendations to being more fully involved. A 3(21) fiduciary can also help see that the plan is complying with the investment-related portions of the ERISA requirements.

As an investment professional, the 3(21) fiduciary can help ensure the selection of investments that are in the best interests of the participants. However, the 3 (21) advisor generally has limited fiduciary responsibility. In a limited role, the 3(21) fiduciary may simply present the plan sponsor or 3(16) fiduciary with a list of investment options such as mutual funds that have been selected to align with the plan’s financial objectives. Whether using a limited or more fully involved 3(31) fiduciary, the plan administrator is still ultimately responsible for making the decisions about where and how to invest.

3(38) Fiduciaries

A 3(38) fiduciary is also an outside financial professional hired for a fee to assist with the plan. Not just any financial professional can fill the role of 3(38) fiduciary. Only banks, insurance companies and registered investment advisors can act as 3(38) fiduciaries to 401(k) plans.

However, the 3(38) fiduciary has the added authority to make investment decisions independently, rather than to simply provide advice and recommendations like a 3(21) fiduciary. That means the 3(38) fiduciary can buy and sell mutual funds and other investments of the plan on their own authority. These fiduciaries have full fiduciary responsibility and liability to manage the plan to the participants’ best interest, similar to the 3(16) fiduciary.

A 3(38) fiduciary is still expected to be transparent about investment decisions, including providing performance reports to the plan sponsor. But the decisions about investments ultimately rest with the 3(38) fiduciary, not the 3(16) fiduciary. This effectively reduces some of the liability on 3(16) fiduciaries. Although a 3(38) fiduciary has the authority to make investment decisions for the plan, the 3(16) fiduciary can still remove and replace the 3(38) fiduciary if performance is unsatisfactory.

Bottom Line

A 401(k) administrator talks to some of her clientsThree types of fiduciaries may work with 401(k) plans. A 3(16) fiduciary oversees administration of the plan. Many plans also have a 3(21) fiduciary that provides advice about how the plan can invest its assets. Some plans have a 3(38) fiduciary who has the authority to actually manage the investments. All three types may be liable for seeing that plan participants get all the benefits they are entitled to. The 3(16) fiduciary is additionally responsible for selecting and overseeing the other fiduciaries.

Tips on Retiring

  • If you are acting as a plan sponsor and effectively are a 3(16) fiduciary, consider working with an experienced financial advisor to help with the investment side of the plan. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • Will you have enough in your 401(k) to retire? One quick way to get a good read on that is to use a free 401(k) calculator.

Photo credit: ©iStock.com/ijeab, ©iStock.com/DNY59, ©iStock.com/Drazen Zigic

 

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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