3(38) vs. 3(21): The Investment Fiduciary Reality Check Every Plan Sponsor Needs

Introduction: Why This Debate Matters More Than Ever

For years, the distinction between ERISA 3(21) and ERISA 3(38) investment fiduciaries felt like a technical nuance—important, but not urgent. That has changed.

In today’s retirement plan environment, fiduciary decisions are no longer evaluated quietly in committee meetings. They’re scrutinized in courtrooms. Litigation, regulatory enforcement, and heightened participant awareness have fundamentally altered what it means to be a prudent plan sponsor.

In this episode of The Wise Fiduciary Podcast, hosts Marta Hurst and Isaac Wood step into the fiduciary frontline to debate a critical question: Is a 3(21) investment fiduciary enough—or does true fiduciary protection require a 3(38)?

What Is an Investment Fiduciary Under ERISA?

Under ERISA, an investment fiduciary is held to one of the highest legal standards in U.S. law—the duty to act solely in the best interest of plan participants and with the care, skill, prudence, and diligence of an expert.

While many advisors operate around plan investments, only those who formally accept fiduciary status under ERISA—such as 3(21) and 3(38) fiduciaries—carry defined legal responsibility.

The key difference between these two roles comes down to one word: discretion.

The 3(21) Fiduciary: Advice Without Authority

A 3(21) investment fiduciary acts as a co-fiduciary. Their role is to recommend investments, provide analysis, and support the plan sponsor or investment committee in making informed decisions.

However, the final decision always rests with the plan sponsor.

• The sponsor approves fund changes
• The sponsor retains fiduciary liability
• The sponsor remains in the decision-making seat

For engaged committees that want to remain hands-on, this model can feel collaborative and empowering. It also provides education, transparency, and a sense of control.

But as the podcast debate highlights, that control comes with a cost.

The 3(38) Fiduciary: Delegation With Accountability

A 3(38) investment fiduciary is fundamentally different. This role carries full discretionary authority over investment selection, monitoring, and replacement.

In plain terms: the 3(38) makes the decisions—and takes legal responsibility for them.

• Investment decisions are fully delegated
• Fiduciary liability for those decisions shifts
• Implementation is streamlined

As Isaac argues in the episode, this isn’t just about convenience—it’s about aligning fiduciary responsibility with fiduciary expertise.

Control vs. Competence: The Core of the Debate

One of the most compelling tensions discussed in the episode is the tradeoff between control and competence.

Many plan sponsors want to be involved. They want insight into why changes are made. They want a voice. And under a 3(21) model, they get exactly that.

But ERISA doesn’t measure intent—it measures outcomes and process. Fiduciaries are judged based on whether decisions were made like an expert would make them.

Wanting to be involved does not make a sponsor qualified to act as an investment expert.

The Litigation Reality: Who Sits in the Defendant’s Chair?

One of the most striking moments in the episode comes down to a simple but powerful distinction:

When an investment decision is challenged in court:

• A 3(38) fiduciary sits in the defendant’s chair
• A 3(21) fiduciary may be watching from the sidelines

In an era where excessive fee lawsuits and imprudence claims continue to rise, that distinction matters. Fiduciary protection is not about having recommendations—it’s about having responsibility aligned with authority.

Is There Still a Place for 3(21)?

As the debate makes clear, this isn’t a question of whether 3(21) fiduciaries are illegitimate. Many provide real value, thoughtful analysis, and meaningful education.

The issue is clarity.

Too often, plan sponsors believe they have delegated risk—when they haven’t. They follow recommendations as if they were mandates, without realizing they remain legally responsible.

That misunderstanding is where fiduciary risk lives.

The Fiduciary Wise Perspective

At Fiduciary Wise, we believe fiduciary roles should be:

• Clearly defined
• Properly delegated
• Aligned with ERISA’s highest standards

Whether a plan chooses a 3(21) or a 3(38) investment fiduciary, the decision must be intentional, documented, and understood—especially by the plan sponsor.

The worst outcome is not choosing one model over the other. The worst outcome is thinking you’ve transferred risk when you haven’t.

Conclusion: Advice Is Helpful. Accountability Is Protective.

The great 401(k) debate isn’t really about which fiduciary role is “better.” It’s about whether fiduciary responsibility matches fiduciary authority.

In a world of increasing scrutiny, plan sponsors must ask themselves a hard question:

Do we want advice—or do we want protection?

Continue the Conversation

If you’re evaluating your investment fiduciary structure—or unsure which role your advisor actually plays—we invite you to talk with us.

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