Should Your Retirement Plan Use a 3(21) or 3(38) Investment Fiduciary?

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.

What a 3(21) Investment Fiduciary Typically Does

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.

Several situations commonly trigger this review:

• inconsistent committee meeting schedules
• limited internal investment expertise
• concerns about documentation consistency
• difficulty maintaining regular investment monitoring
• committee turnover over time

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.

A Final Word on Oversight

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

Important Disclosure

Educational purpose only. Provided by First Hill Trust Company for general informational and educational purposes only. It is not legal, tax, accounting, investment, or fiduciary advice, does not constitute a recommendation regarding any plan, investment, strategy, or course of action, and does not consider any recipient’s specific circumstances. Consult your own qualified advisors before acting.
No offer, agreement, or commitment. Nothing in this material constitutes an offer, solicitation, agreement, or commitment to provide any particular service or to assume any particular responsibility. Descriptions of what a trustee, administrator, adviser, committee, employer, or other party “may” or “can” do are illustrative of how such arrangements commonly work and do not describe the terms of any specific engagement. The actual services provided, the allocation of responsibilities, the scope of any delegation, and the duties of any party are governed solely by the applicable plan documents, trust agreement, advisory agreement, and written service agreements. In the event of any inconsistency, those documents control.
Services and regulatory status. First Hill Trust Company and its affiliates offer retirement plan services, recordkeeping and administrative services, trust and fiduciary services, investment advisory services, and group benefits services, in each case subject to applicable regulatory requirements and the terms of the relevant agreements. Not all services are offered to all clients, in all states, or in all circumstances. Investment advisory services are offered through an affiliated investment adviser; a copy of its Form ADV Part 2A is available upon request. Insurance and group benefits products are offered through appropriately licensed entities. The availability and scope of any service depend on eligibility and the applicable agreements.
Fiduciary status under ERISA. Fiduciary status under the Employee Retirement Income Security Act of 1974, as amended (“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 the facts and circumstances specific to the plan and the relationship. Engaging a trustee, adviser, or other service provider does not eliminate a plan sponsor’s or committee’s own fiduciary responsibilities, including the duties to prudently select and monitor any party to whom responsibilities are delegated.
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Statutory and regulatory references. References to ERISA, the Internal Revenue Code, 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, Internal Revenue Service, or other relevant authorities, and they do not address how those provisions may apply to any particular plan, sponsor, fiduciary, or individual. Laws, regulations, and guidance are subject to change and to interpretation by the relevant agencies and courts. Examples, categories, and situations described are simplified for illustration and may not reflect the requirements or circumstances of any particular plan or person.
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