What is a 3(16), 3(21), or 3(38) Fiduciary?
401(k) Plan Sponsors may consider retaining outside help to assist the organization in meeting various fiduciary responsibilities. ERISA generally defines a fiduciary as anyone who makes decisions related to the administration of the Plan or is involved in the selection and monitoring of Plan investment choices. Anyone paid to provide investment advice is automatically considered a fiduciary.
To prepare for any meaningful conversation of fiduciary responsibilities, there are a few terms one should be familiar with and have a basic working knowledge of - §3(16), §3(21) and §3(38). When you hear these terms, understand they reference code sections of The Employee Retirement Income Security Act of 1974 (“ERISA”).
Code Section 3(16) – The Plan Administrator
§3(16) of ERISA pertains to the “Plan Administrator”. The Plan Administrator is responsible for overseeing the day-to-day operations of the Plan and, unless an alternate election is made, the Plan Sponsor (the Company) will default to being the Plan Administrator.
To ease the administrative burden of running the 401(k) Plan, some Sponsors elect to hire a provider to perform as the Plan Administrator. In this arrangement, the service provider must sign on and agree to be a §3(16) fiduciary of the Plan.
A partial list of some of the responsibilities a §3(16) fiduciary can be assigned is: to provide all required participant notices; make determinations of participant eligibility; review and approve loans and distributions; fix operational Plan errors; retain other service providers to assist with Plan administration; and to sign and file IRS Form 5500.
It is important to clarify that many Sponsors employee third-party-administrators (TPA) to assist with things such as gathering documentation for loans and distributions, performing compliance testing and completing IRS Form 5500. A TPA can be a fiduciary, but generally is not. Unless the TPA specifically signs on as a §3(16) fiduciary, they are not a fiduciary and have no discretionary ability to make decisions.
Code Section 3(21) – Co-Fiduciary Investment Advisor
When an investment advisor discusses functioning as a §3(21) fiduciary, their services include providing investment advice and making specific recommendations. §3(21) fiduciaries do not have decision-making authority. Ultimately, the Plan Administrator decides whether to accept or reject the advice of the investment advisor. In this relationship, the advisor is a §3(21) co-fiduciary of the Plan.
Code Section 3(38) – Investment Manager with full discretion to make decisions
Investment advisors performing as a §3(38) fiduciary are referred to as “investment managers”. In this capacity, the advisor has the discretionary authority to select, monitor and make replacements to the investment lineup offered in the Plan.
Only banks, insurance companies, or a registered investment advisor can serve as a §3(38) fiduciary. From a liability standpoint, a §3(38) investment manager will shield the Plan Sponsor from a greater level of fiduciary liability than a §3(21) investment advisor will.
We like to stress to Plan Sponsors that it is important to remember that while providers can be hired to assist in fulfilling fiduciary responsibilities, one cannot be absolved of their fiduciary status by hiring outside help. For instance, the fiduciary responsibility for the selection and monitoring of Plan investments can be delegated to an investment manager, but the Plan Sponsor has a fiduciary responsibility for hiring and monitoring the actions of the investment manager.
Scott M Dufek, CPA | 11/09/2018