Retirement plan committees are often told they should “hire a fiduciary,” but that phrase can mean very different things depending on the structure being discussed.
Some providers serve as a 3(21) investment advisor and provide recommendations, while others act as a 3(38) investment manager with discretionary authority over investment decisions.
For plan sponsors, the distinction matters because the level of responsibility retained by the committee changes significantly between the two arrangements. Understanding how these structures work can help committees determine which approach better fits their oversight process, internal expertise, and governance goals.
Why This Distinction Matters
Many committees assume that hiring any outside investment professional automatically transfers investment responsibility away from the employer. In practice, the answer is more nuanced.
Under ERISA, plan sponsors still maintain an obligation to prudently select and monitor service providers. However, the type of fiduciary relationship established can materially change how day-to-day investment decisions are handled and how oversight responsibilities are divided.
Committees that clearly understand the difference between 3(21) and 3(38) arrangements are often better positioned to:
define decision-making responsibilities
establish a more consistent oversight process
reduce confusion during committee reviews
document fiduciary responsibilities more clearly
For many organizations, the challenge is not simply choosing an investment lineup. The larger challenge is determining who is responsible for making, documenting, and implementing investment decisions over time.
Committees that are evaluating their current oversight structure often find it helpful to use a framework that compares how fiduciary responsibilities differ under each model.
Decision Tool
3(21) vs. 3(38) Comparison Matrix & Decision Tool
A practical framework to compare investment fiduciary structures, committee responsibilities, oversight expectations, and delegation considerations.
A 3(21) fiduciary generally provides investment recommendations to the retirement plan committee. This can include guidance related to fund selection, investment monitoring, benchmarking, or updates to the investment policy statement.
The key distinction is that the committee retains final decision-making authority.
Under this structure, the committee is still responsible for:
approving investment changes
documenting investment decisions
reviewing recommendations
maintaining oversight of the investment lineup
For some committees, this model works well because they want to remain directly involved in investment decisions while still receiving professional guidance.
Organizations with experienced internal committees or strong governance processes sometimes prefer the collaborative nature of a 3(21) arrangement. The committee maintains control while relying on outside expertise for analysis and recommendations.
At the same time, the structure requires committees to remain actively engaged in the decision-making process. If investment reviews become inconsistent or poorly documented, fiduciary exposure can still develop.
Many committees underestimate how broadly fiduciary responsibility can extend within the committee structure, particularly when fiduciary roles and responsibilities within the retirement plan committee are not clearly defined and documented over time.
How a 3(38) Investment Manager Changes the Structure
A 3(38) investment manager accepts discretionary authority to make investment decisions for the plan.
This typically includes:
selecting and replacing investment options
monitoring fund performance
implementing lineup changes
maintaining investment consistency with the investment policy statement
Under a properly structured 3(38) arrangement, the committee delegates discretionary investment decision authority to the investment manager.
That does not eliminate all fiduciary responsibility for the plan sponsor.
Committees must still prudently select and monitor the 3(38) provider itself. However, responsibility for the actual investment decisions generally shifts to the delegated investment manager when the arrangement is properly structured and documented under ERISA.
For some committees, this structure creates operational consistency and reduces the burden of ongoing investment reviews. It can also help create clearer accountability regarding who is making investment decisions and when those decisions are implemented.
For many organizations, evaluating a 3(38) arrangement also becomes part of a broader discussion around how fiduciary, administrative, and trustee responsibilities are divided across the retirement plan oversight structure.
When Committees Often Consider Moving Toward a 3(38) Structure
Committees usually do not consider delegation because they suddenly lose interest in the retirement plan. More often, the discussion develops because the committee recognizes that investment oversight has become increasingly complex.
In some organizations, committee members may feel comfortable overseeing the plan operationally but less confident making investment decisions directly. In those situations, a 3(38) structure may provide a clearer governance framework.
Other committees prefer to retain direct control over investment decisions because they want to remain closely involved in lineup construction and provider discussions. Neither structure is automatically correct for every organization.
The more important question is whether the oversight model aligns with how the committee actually operates in practice.
Practical Takeaway for Plan Sponsors
The decision between a 3(21) and 3(38) fiduciary structure is ultimately a governance decision, not just an investment decision.
Committees should evaluate how responsibilities are currently handled, who is making investment decisions, how consistently those decisions are documented, and whether the committee has the time and expertise necessary to maintain ongoing oversight.
A well-structured process is often more important than selecting the “most protective” label. The goal is to establish a fiduciary framework that the committee can realistically sustain over time.
Putting It Into Practice
The real question is often not whether a committee wants to retain investment authority. It is whether the committee has the time, structure, and consistency necessary to actively oversee investment decisions on an ongoing basis.
Many committees are not struggling because they lack good intentions or qualified providers. The challenge is often determining whether the committee realistically has the oversight process necessary to consistently make, review, and document investment decisions over time.
If You Want a Clearer View of Your Plan
Some committees simply want confirmation that their current structure aligns with how responsibilities are actually being handled in practice. Others are evaluating whether a more delegated investment oversight model may improve consistency, documentation, or operational efficiency.
First Hill Trust can provide a brief review focused on:
current investment oversight structure
committee investment decision responsibilities
delegation and documentation processes
overall fiduciary governance alignment
Prefer to Evaluate This Internally?
Use the 3(21) vs. 3(38) Comparison Matrix & Decision Tool to help organize the discussion and clarify where investment responsibilities currently sit within your plan structure.
Decision Tool
3(21) vs. 3(38) Comparison Matrix & Decision Tool
A practical framework to compare investment fiduciary structures, committee responsibilities, oversight expectations, and delegation considerations.
The most effective fiduciary structures are usually the ones that align with how committees actually function on an ongoing basis. Some committees prefer collaborative investment oversight, while others prefer a more delegated structure with clearly assigned authority.
What matters most is that responsibilities are understood, oversight remains consistent, and the process is documented thoughtfully over time. Clear fiduciary structure often creates clearer governance overall.
Plan Sponsor FAQs
No. Appointing an ERISA 3(38) investment manager shifts liability for the individual investment decisions to that manager, but the plan sponsor retains the fiduciary duty to prudently select the manager in the first place and to monitor the arrangement on an ongoing basis.
That monitoring obligation, along with the documentation supporting it, never transfers, so a sponsor who selects carelessly or stops reviewing the manager's performance remains exposed.
Yes. Even though a 3(38) investment manager holds discretion over the actual investment decisions, the committee continues to monitor the manager's process, overall plan performance, and adherence to the investment policy statement.
This ongoing review is not second-guessing individual fund selections but rather satisfying the committee's own duty to prudently oversee the arrangement, and it should be captured in meeting minutes as part of the documented monitoring process.
Yes. A 3(21) advisor is a fiduciary under ERISA because they give investment advice for a fee, but they share that role with the committee rather than taking it over. The advisor recommends, the committee decides, and both carry fiduciary responsibility for their part of the process.
Some committees like keeping the final say over investment decisions while still having a professional advisor to lean on for recommendations.
It comes down to a tradeoff: a 3(21) structure means more control and continued involvement, but the committee also keeps more of the fiduciary responsibility than it would under a 3(38) arrangement.
Not necessarily. Neither structure is inherently better; the right fit depends on the committee's own process, internal expertise, how hands-on it wants to be, and how much capacity it has to stay involved in investment decisions.
A committee with the time and know-how might prefer the control of a 3(21), while one looking to offload investment discretion may lean toward a 3(38).
Important Disclosure
First Hill Trust offers retirement plan services, recordkeeping, trust and fiduciary oversight, investment advisory, and group benefits in accordance with applicable regulatory requirements and fiduciary standards.
This material is provided for general informational and educational purposes only. It is not intended as, and should not be relied upon as, legal, tax, accounting, investment, or fiduciary advice, and it does not constitute a recommendation regarding any specific plan, investment, strategy, or course of action.
References to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and related statutory or regulatory provisions are general summaries only. They are not a substitute for review of the actual statutory text, regulations, or guidance from the Department of Labor or Internal Revenue Service, and they do not address how those provisions may apply to any particular plan, sponsor, or fiduciary.
Fiduciary status under ERISA is determined based on the functions performed and the authority exercised, not on titles or labels. Whether any particular party is acting as a fiduciary, and the scope of any related duties or potential liability, depends on facts and circumstances specific to the plan and the relationship.
Plan sponsors and fiduciaries should consult with qualified legal counsel, tax advisors, and other appropriate professionals before making decisions regarding plan governance, the selection or monitoring of service providers, the allocation or delegation of fiduciary responsibilities, or any other plan-related matter. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results, and outcomes are not guaranteed.
