The Growing Importance of the 3(38) Fiduciary

March 15, 2019

Over the past decade, there has been a significant trend towards scrutinizing the qualifications of retirement plan advisors. Historically, plans could be established by stock brokers, insurance agents, accountants, attorneys, and other professional groups. The ‘side business’ aspect of this industry was enabled by high and often hidden consumer paid fees.

Excessive fee lawsuits and the proposed Fiduciary Rule are two significant factors that have accelerated qualified plan sponsors review of the qualifications of their advisor. The old hierarchy of qualification moved from having an insurance license to basic securities licenses to being a registered investment advisor.

Along with the additional scrutiny and oversight of the qualified plan market comes additional liability. Insurance agencies and security brokers have started to limit the ability of their sales forces to advise on plans. Most firms require that a plan be sold and serviced by a specialist who is a designated fiduciary.

In the world of qualified retirement plans, there are two levels of fiduciary services that a retirement plan advisor may offer. The first is a 3(21) fiduciary. The 3(21) fiduciary status simply means that the advisor acknowledges that the client is reliant upon the advisor and the advisory firm for investment information and recommendations. A 3(21) advisor informs and recommends, but requires the client to make the final decisions or implement investment changes. As such, a 3(21) advisor accepts joint investment advisory liability.

The second fiduciary service is a 3(38) fiduciary. This fiduciary service is an elevated standard because it entails more responsibility on the part of the advisor (and their firm) and has inherently more liability. A 3(38) fiduciary takes responsibility for selecting, monitoring, and changing the funds in the plan. From a practical perspective, this means that most employers who select an advisor’s 3(38) service no longer have regular retirement plan committee meetings. They instead periodically review the documentation and results of the advisory firm’s work.

For many mid-market employers this service frees up a significant amount of time for their executives and professional staff. It also ensures that the employer is working with an advisor that has attained the highest level of professional standard and who accepts the investment decision liability.

The 3(38) service is typically a slight advisory fee premium above a standard 3(21) advisory fee. Given the elevated responsibility assumed by the advisor and the soft dollar cost savings to the employer, it is not surprising that this is a growing trend in the retirement plan industry.

Brick Brickley, CEBS

Brick is a principal with Spherient Advisors, and serves as a 3(21) or 3(38) fiduciary for his clients.  He has been serving his clients in this space for more than 27 years. He can be reached at or 800-385-2309.