When it comes to managing retirement plans, fiduciaries play a crucial role in ensuring compliance with legal regulations and protecting the best interests of plan participants. However, navigating the different types of fiduciaries can be confusing, particularly when it comes to understanding the distinctions between 3(16), 3(21), and 3(38) fiduciaries. In this blog post, we will explore each type of fiduciary and the responsibilities they hold.
1. 3(16) Fiduciaries: The Administrator
A 3(16) fiduciary is often referred to as the plan administrator. These fiduciaries handle the day-to-day administration and management of retirement plans. Their responsibilities may include tasks such as signing and filing plan documents, preparing and distributing plan notices, approving distributions, managing plan loans, and ensuring compliance with all applicable laws and regulations. Essentially, the 3(16) fiduciary takes on the administrative responsibilities of the retirement plan, relieving the plan sponsor of those duties.
It’s important to note that while the 3(16) fiduciary may handle administrative tasks, they do not have control over the plan’s investments. Their role is solely focused on the administrative and record-keeping aspects of the plan.
2. 3(21) Fiduciaries: The Investment Advisor
Unlike the 3(16) fiduciary, the 3(21) fiduciary is involved in the investment decisions of the retirement plan. This type of fiduciary acts as an investment advisor and provides recommendations and guidance regarding investment options. While the 3(21) fiduciary has a duty to act in the best interest of the plan participants, the final decision-making authority still rests with the plan sponsor or trustee.
Typically, 3(21) fiduciaries are hired by the plan sponsor to provide expertise and advice on investment options, fund selection, and portfolio diversification. They help the plan sponsor make informed decisions but do not have the power to execute those decisions themselves.
3. 3(38) Fiduciaries: The Investment Manager
The 3(38) fiduciary, also known as an investment manager, takes on a higher level of responsibility than the 3(21) fiduciary. When a plan sponsor appoints a 3(38) fiduciary, they delegate the responsibility and authority for investment decisions to the fiduciary. Unlike the 3(21) fiduciary, the 3(38) fiduciary has discretionary control over the plan’s investment decisions. This means that they have the power to buy, sell, or hold investments without prior consultation with the plan sponsor.
By appointing a 3(38) fiduciary, the plan sponsor can transfer the liability and responsibility for investment decisions, reducing their own fiduciary liability. However, it’s important to note that the plan sponsor is still responsible for prudently selecting and monitoring the 3(38) fiduciary. If the 3(38) fiduciary fails to perform their duties adequately, the plan sponsor may still be held accountable for the selection of the fiduciary.
Understanding the Distinctions
When considering the different types of fiduciaries, it’s important for plan sponsors to evaluate their own needs and the level of control they want to maintain over certain aspects of their retirement plan. The decision to appoint a 3(16), 3(21), or 3(38) fiduciary depends on factors such as the size and complexity of the plan, the expertise and resources available within the organization, and the desire to shift certain responsibilities to a fiduciary expert.
Summary
Overall, by having a clear understanding of the distinctions between these fiduciaries, plan sponsors can make informed decisions that align with their specific needs and goals. Seeking advice from retirement plan consultants and ERISA attorneys can help plan sponsors navigate the complexities of fiduciary responsibilities and ensure compliance with all regulatory requirements.
Need Pension Consulting & Pension Plans in Phoenix, AZ?
Fiduciary Advisors, Ltd. is a business-to-business associated pension administrator based in Phoenix, Arizona, since 1990. We specialize in designing and planning employee retirement programs, pensions, profit sharing, and are third-party administrators for 401K for small- to medium-size businesses. We conduct enrollment meetings, prepare detailed actuarial calculations, cash-balance plans, and financial consultation for all businesses. Give us a call today for more information!