3(21) vs. 3(38) Investment Fiduciary — And What It Means If Your Advisor Is Neither

Three advisors can sit in the same committee meeting, present the same fund lineup, and use nearly identical language. From across the table they look the same. The difference only becomes visible when an investment underperforms for years and someone asks who was legally responsible for watching it.

That answer depends on which of three roles your advisor actually occupies: an ERISA 3(21) investment fiduciary, an ERISA 3(38) investment manager, or — more often than sponsors realize — no fiduciary role at all.

Many plan sponsors cannot say with confidence which one they have. This guide explains the difference, what each does and does not shift off your shoulders, and how to decide which is right for your participants.

ERISA 3(21): The Advisor Who Recommends

Section 3(21) is ERISA's general definition of a fiduciary. Strictly speaking, it covers anyone with discretionary authority over the plan — which is why, as a plan sponsor, you are already a 3(21) fiduciary yourself.

When the industry says “a 3(21) advisor,” it almost always means a limited-scope 3(21): a firm hired to give investment advice for a fee, and which acknowledges fiduciary status for that advice. The defining characteristic is where authority sits:

• The advisor recommends which funds to add, keep, watch, or remove
• You decide. Nothing changes until the committee votes to approve it
• The advisor is a co-fiduciary and is responsible for the quality of its recommendations
• You retain fiduciary responsibility for the final lineup, because you made the decision

This is a genuine sharing of responsibility, not a transfer of it. If the committee approves a recommendation, the committee owns that choice. Rejecting sound advice does not move liability to the advisor either — if anything, overriding your advisor without a documented reason is exactly the fact pattern plaintiffs' lawyers look for.

ERISA 3(38): The Manager Who Decides

Section 3(38) defines a narrower and more powerful role: an investment manager with full discretionary authority to select, monitor, replace, and remove plan investments. A 3(38) does not bring recommendations to the committee for approval. It makes the change and reports it.

ERISA sets specific requirements. To be a 3(38) investment manager, a firm must:

1. Have the power to manage, acquire, or dispose of plan assets
2. Be a registered investment adviser under the Investment Advisers Act (or registered under state law), a bank, or an insurance company qualified to manage plan assets under the laws of more than one state
3. Acknowledge in writing that it is a fiduciary with respect to the plan
4. Be properly appointed by a named fiduciary of the plan — that is, by you

That written acknowledgment matters enormously. A firm describing itself as “acting in a 3(38) capacity” in a brochure, with no such language in the executed service agreement, has not accepted the role. If it is not in the contract, you do not have it.

When a 3(38) is properly appointed, ERISA Section 405(d)(1) provides that the trustee is not liable for that manager's acts or omissions, and is not obligated to manage the assets under its control. That is the real value of the arrangement: the investment-selection liability genuinely moves.

The Third Category: An Advisor With No Fiduciary Role

This is the option nobody puts on a comparison chart, and it is more common than sponsors assume. An advisor can attend every committee meeting, deliver quarterly investment reviews, and suggest fund changes — while carrying no ERISA fiduciary status at all.

Whether investment advice creates fiduciary status is currently governed by the 1975 five-part test. The Department of Labor's 2024 Retirement Security Rule would have broadened that definition considerably, but it was challenged in court, stayed before taking effect, and vacated in March 2026. The older and narrower standard is once again the operative law.

Under it, a person is an investment-advice fiduciary only if all five of the following are true. They must:

1. Render advice as to the value of securities or make investment recommendations
2. Do so on a regular basis
3. Act pursuant to a mutual agreement, arrangement, or understanding with the plan
4. Provide advice that serves as a primary basis for investment decisions
5. Give advice that is individualized to the particular needs of the plan

Because every element must be satisfied, the test is comparatively easy to fall outside of. Occasional or one-off recommendations generally do not create fiduciary status. Neither does a relationship in which the service agreement expressly states that the firm's advice is not intended to serve as a primary basis for plan decisions — language that appears in a great many brokerage and consulting agreements precisely because it defeats the fourth element.

The Three Roles Side by Side

What No Arrangement Relieves You Of

This is the point most often misunderstood, and it is worth being blunt about: hiring a 3(38) does not make you a bystander.

Section 405(d)(1) protects you from liability for the manager's investment decisions. It does not protect you from the decision to hire that manager, or from failing to notice that they stopped doing their job. You retain the duty to:

• Select the manager prudently, considering qualifications, process, and cost
• Document the due diligence behind that appointment
• Monitor the manager on an ongoing basis
• Replace them if they are no longer serving participants well
• Ensure the fees paid remain reasonable for the services received

In Tibble v. Edison International (2015), the Supreme Court confirmed that fiduciaries have a continuing duty to monitor — separate and apart from the duty they owe at the moment of selection. Delegation changes the subject of your monitoring. It does not end the obligation to monitor.

How to Find Out What You Actually Have

Do not rely on how your advisor describes themselves verbally, in a pitch deck, or on a website. Check these four things:

1. The executed service agreement. Look for an explicit written acknowledgment of fiduciary status, and for whether it cites 3(21) or 3(38). Equally, look for disclaimers stating the advice is not a primary basis for plan decisions.
2. Your 408(b)(2) disclosure. Covered service providers must state whether they are acting as a fiduciary. This is often the fastest place to get a straight answer.
3. Form ADV. A 3(38) must be a registered investment adviser, bank, or qualified insurer. If your advisor is a broker-dealer representative with no advisory registration, they cannot be your 3(38).
4. Scope, not just status. Fiduciary status is frequently limited to specific services. An advisor may be a fiduciary for fund selection but explicitly not for the target-date series, the stable value option, or participant advice.

How to Decide What Is Right for Your Participants

There is no universally correct answer, and any advisor who tells you otherwise is selling rather than advising. ERISA does not favor one model. It requires a prudent process.

A 3(38) tends to fit when: your committee lacks deep investment expertise; members are stretched thin and meetings slip; decisions get deferred for months; your documentation of investment decisions is thin; or you want the cleanest possible separation between the plan's investments and company management.

A 3(21) tends to fit when: your committee has genuine investment knowledge and wants to stay hands-on; you have specific views about menu construction; your governance process is strong and well-documented; or you want expert input while retaining control over the lineup participants receive.

A non-fiduciary arrangement fits when: you have deliberately chosen to retain full responsibility, you have the expertise to exercise it, and the committee understands and has documented that choice. What should worry you is being in this category without having decided to be.

What It Costs

Sponsors often assume 3(38) discretion carries a large premium. In practice the gap is usually smaller than expected, and sometimes zero. Industry survey data suggests most advisors who offer 3(21) services fold them into their standard fee, while roughly half of those offering 3(38) charge something additional for it. Pricing varies widely by firm and plan size, so treat any quoted spread as a starting point for negotiation rather than a market rate.

The more useful comparison is not 3(21) versus 3(38) pricing in isolation, but what your advisor charges relative to what comparable plans pay for a comparable scope of service. An advisor accepting real discretionary liability at a fair price may be better value than a cheaper one accepting none. Benchmark the fee against the role, not just the fee against the market.

The Bottom Line

A 3(21) advises and you decide. A 3(38) decides and reports. An advisor with no fiduciary role leaves every investment decision, and every consequence, with you.

None of the three is automatically wrong. What is difficult to defend is not knowing which one you have — because that means the committee never actually made the decision. Read the agreement, confirm the acknowledgment in writing, document why the structure suits your plan, and revisit it as your committee and plan change.