The phrase "we outsourced the fiduciary risk" gets used in finals meetings as if it settles the matter. This post explains what 3(21) and 3(38) move, and what stays with the sponsor no matter who signs what.
A sponsor told us last year that her committee had "gotten rid of the fiduciary risk" by hiring a 3(38). She said it the way you announce that a problem is closed. We asked who picked the 3(38), and she paused. That pause is what this article is about.
Much of the talk about these two numbers makes the same mistake: treating a fiduciary role as something you can hand off and walk away from. ERISA does not work that way. Some liability moves and some stays put. Knowing which is which is the job, and advisors often stay vague about it because vagueness sells better in a finals presentation.
3(21) is ERISA's definition of a fiduciary, and it is broad on purpose. Under section 3(21)(A), you are a fiduciary if you exercise discretionary authority or control over the plan or its assets, or if you render investment advice for a fee. The operative verb is render advice. A 3(21) investment fiduciary recommends, and the committee decides. You bring the lineup analysis, you make the case for swapping out the underperforming mid-cap value fund, and the committee votes. You are a co-fiduciary who shares the work while the committee owns the decision.
3(38) is narrower: an "investment manager." To qualify, you have to be a registered investment adviser, a bank, or a qualified insurance company, and you have to acknowledge your fiduciary status in writing. A 3(38) has discretion. It selects, monitors, and replaces the plan's investments on its own authority. The committee does not vote on whether to drop that mid-cap value fund. The 3(38) drops it and tells them afterward.
This is where people overclaim. When a sponsor properly appoints a 3(38) investment manager, ERISA section 405(d)(1) relieves the other plan fiduciaries of liability for that manager's acts. That relief is real. If the 3(38) builds a lineup and one of its picks blows up, the committee is generally not on the hook for that particular decision. For a committee of people who run a manufacturing business and think about the 401(k) twice a year, that is a legitimate reason to delegate.
Read the relief narrowly, because the statute is narrow. Liability shifts for the investment decisions the manager has authority over, and that is all. The duty to have selected that manager prudently in the first place stays with the sponsor, and so does the duty to keep watching them.
The duty to select and monitor the people you delegate to stays with the sponsor permanently. You cannot hire your way out of it, because hiring is itself a fiduciary act. The committee that "got rid of the risk" by appointing a 3(38) has signed up for a new and ongoing obligation: vetting that 3(38) prudently on the way in, and monitoring it for as long as it serves.
The residual duties look like this:
"Outsourced the fiduciary risk" skips over this. The sponsor traded the risk of picking funds badly for the risk of picking and monitoring a manager badly. For many sponsors that is a good trade, and they are still in the game.
This is a real choice with no universally correct answer, and an advisor who claims otherwise is selling. The factors:
Lean toward 3(38) when the committee lacks the time, expertise, or appetite to make investment decisions and would rather pay someone to own them. Small and mid-size plans often fit. The committee's life gets simpler and its decision-level investment liability shrinks. Be clear that your own liability as the advisor rises by the same amount, because you now own those calls, and price the engagement accordingly.
Stay 3(21) when the committee wants to keep the chair. Some sponsors, especially larger ones with internal investment expertise, want to make the final decisions and value an adviser who sharpens their thinking. 3(21) is a different division of labor, and an equally legitimate one.
Do not let anyone treat the choice as a way to make liability vanish. The sponsor is a named fiduciary the moment the plan exists. Each delegation is the sponsor exercising fiduciary authority, which makes it a fiduciary act that has to be done prudently and written down. The hat changes who decides what. A person still decided, and the file has to record why.
When a sponsor says "we moved the risk," the correction is short: you moved a category of decisions, and the duty to choose well and watch closely stayed with you. Help them run that process, and write down why they picked the role they did. A structure built that way holds up far better than the language used to sell it.
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