A 3(21) investment adviser recommends investments while you make (and answer for) every final decision; a 3(38) investment manager takes written discretionary authority, and under ERISA § 405(d) a prudently appointed manager — not you — is generally responsible for its individual investment decisions. Your irreducible duty under either: prudent selection and monitoring of the professional, plus all non-investment plan obligations.
Two numbers, two different jobs
Both terms cite definitions in ERISA. A 3(21) investment adviser (ERISA § 3(21)(A), 29 U.S.C. § 1002(21)) is a fiduciary because they render investment advice for a fee — they recommend, and you decide. A 3(38) investment manager (ERISA § 3(38)) is appointed with discretion — they decide, within a written mandate, and answer for the decisions. Both are fiduciaries. The difference is who holds the final authority, and therefore who holds the primary responsibility when an investment decision is challenged.
The confusion is commercially convenient. "Fiduciary advisor" appears on both kinds of proposals, and an owner skimming a deck can easily believe they've delegated something they haven't. The test is always the same: who has the authority to change a fund without the other's approval? If the answer is you, you have a 3(21).
Side by side
| 3(21) investment adviser | 3(38) investment manager | |
|---|---|---|
| Role | Recommends investments | Selects and replaces investments |
| Final decision | Yours | The manager's, within its mandate |
| Fiduciary status | Co-fiduciary for its advice | Fiduciary with discretion, acknowledged in writing |
| Responsibility for fund choices | Shared — you made the call | Primarily the manager's |
| Your remaining investment duty | Evaluate every recommendation prudently | Prudently select and monitor the manager |
| Your time commitment | Ongoing — committee meetings, sign-offs | Periodic — review the manager's reporting |
| Typical relative cost | Lower fee, more of your labor | Somewhat higher fee, less of your labor |
| Who may serve | Any investment-advice fiduciary | RIA, bank or insurer only, per the statute |
The liability difference, precisely
Under a 3(21) arrangement, every fund on the menu is there because you approved it. The adviser shares fiduciary responsibility for the quality of the advice, but ERISA's prudence duty attaches to the decision-maker — and that's you. In a dispute over, say, a chronically expensive share class, "my adviser recommended it" is a fact in your favour, not a defense that ends the inquiry. You were the fiduciary who acted.
Under a properly documented 3(38) arrangement, ERISA § 405(d) does something unusual: when an investment manager has been prudently appointed, the appointing fiduciary is generally not liable for the individual acts or omissions of the manager — and is not obligated to second-guess each transaction. Your duty consolidates into two things you can actually perform: choosing the manager carefully, and monitoring it periodically.
Neither arrangement touches the rest of your fiduciary life: timely deposit of deferrals, reasonable total plan costs, required notices, the fidelity bond. Those are yours either way — the ERISA basics guide lists them.
When a 3(21) genuinely fits
- You want to stay involved. Some owners have an investment committee, enjoy the work, and want expert input rather than delegation.
- An existing committee needs cover, not replacement. Larger small businesses with HR staff sometimes want a co-fiduciary opinion layered onto a process they already run well.
- Cost is the binding constraint. 3(21) service is usually cheaper. If the alternative is no fiduciary help at all, a 3(21) is much better than nothing.
When a 3(38) fits better
- Nobody at the company wants to evaluate mutual funds. The honest situation of most sub-50-employee businesses. Delegation you actually use beats involvement you skip.
- You want the decision trail to point at a professional. Investment selection is the most litigated corner of 401(k) practice; a discretionary manager owns that corner.
- Meetings don't happen. If the "investment committee" is you, in December, signing whatever the advisor sent — you already have de facto delegation, without the legal protection of the real thing.
What a 3(38) actually does day to day is covered in what is a 3(38) fiduciary; where the fee sits inside the plan's total cost stack is in what a small-business 401(k) costs. Our own 3(38) service is described at plan fiduciary services.
Check the paper, not the pitch
Whichever way you go, the services agreement is the arrangement. Look for: the ERISA section actually cited; a written acknowledgment of fiduciary status; whether discretion is granted or advice is merely offered; the fee, all-in and in dollars; and the termination terms. If the agreement is vague about the section, the vagueness is the answer. A five-minute read of one page of contract settles what an hour of sales conversation obscures.
Common questions
Is a 3(38) always better than a 3(21)?
No — it's a different allocation of work and responsibility, at a somewhat different price. A 3(21) fits owners who genuinely run an investment process and want expert input; a 3(38) fits owners who want the investment function performed for them. The wrong choice is believing you have one when the contract says the other.
Can the same firm be both 3(21) and 3(38)?
A firm can offer either service, but for a given plan the agreement grants discretion or it doesn't. Some providers also bundle a 3(16) administrative fiduciary role — a third, separate job covering filings and notices rather than investments. Read which sections the contract actually invokes.
Does either one protect me if fees are too high?
Only partly. A 3(38)'s mandate typically covers the investment menu, including share-class and fund-cost prudence. The reasonableness of what the recordkeeper, TPA and adviser charge the plan overall remains your duty — that's why the DOL requires 408(b)(2) fee disclosures to you, the hiring fiduciary.
We've had the same advisor for years and I've never seen these terms. What now?
Pull the services agreement and look for an ERISA fiduciary acknowledgment. Many small plans are served by brokers who are not fiduciaries at all — legal, but worth knowing. Asking your provider to state their status in writing is a reasonable request that a good one answers immediately.
Sources
- ERISA § 3(21)(A) and § 3(38), 29 U.S.C. § 1002 (fiduciary and investment-manager definitions)
- ERISA § 405(d), 29 U.S.C. § 1105(d) (liability effect of appointing an investment manager)
- U.S. Department of Labor, Meeting Your Fiduciary Responsibilities, dol.gov/agencies/ebsa
- U.S. Department of Labor, 29 C.F.R. § 2550.408b-2 (service-provider fee disclosure)
Not sure which one your plan has?
Send us your current services agreement. We'll tell you which ERISA role it actually grants — and what that means for you — at no charge.