What Is a 3(21) Fiduciary?
When you invest in a retirement plan such as an employer-sponsored 401k, you may have the ability to choose from a variety of stocks, bonds and mutual funds to help you grow your retirement savings. However, you do not have an active role in determining how your plan sponsor manages these investments. In most cases, your plan sponsor relies on an adviser, usually a 3(21) fiduciary, to make recommendations regarding fund management.
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Definition
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A 3(21) fiduciary is an investment advisor who helps a retirement plan sponsor manage investments under the Employee Retirement Income Security Act of 1974, section 3(21). A fiduciary is a person or company that has the responsibility to act for another company or person -- in the case of a retirement plan, the fiduciary acts for the plan sponsor. A plan sponsor is an employer or other entity that manages a retirement plan. This type of fiduciary is responsible for making recommendations regarding the monitoring, selection and replacement of investments in a sponsor's retirement plan. A plan sponsor may use a 3(21) fiduciary's recommendations to offer a new investment or replace a currently available investment with another mutual fund, bond or group of stocks.
Legal Liability
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Although a 3(21) fiduciary serves the function of an adviser regarding the selection and replacement of specific investments available to participants of a retirement plan, he does not bear legal liability for the outcome experienced by a plan sponsor when following his advice. ERISA limits this type of fiduciary to recommending or aiding the plan sponsor; the sponsor is solely responsible for the decisions it makes regarding retirement plan investments.
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Comparison to 3(38) Fiduciary
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Unlike a 3(21) fiduciary, a 3(38) fiduciary is legally responsible for the services it provides to a retirement plan sponsor. A 3(38) fiduciary is a bank, insurance company or registered investment advisor who makes investment decisions on behalf of a plan sponsor. This type of fiduciary makes active decisions regarding the selection and replacement of investments, rather than merely acting in an advisory capacity. Also, although an independent broker may act as a 3(21) fiduciary, she may not act as a 3(38) fiduciary.
Plan Sponsor
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The sponsor of a retirement plan is also considered a 3(21) fiduciary; however, unlike 3(21) fiduciaries that the sponsor retains to provide investment advice, the plan sponsor is a "full scope" named fiduciary. A named fiduciary is listed in the plan documents; conversely, an unnamed fiduciary is not listed in the plan documents, but may work on behalf of a named fiduciary. The sponsor has ultimate authority over the retirement plan and makes decisions regarding the monitoring, selection and replacement of investments within the plan. As the named fiduciary, the plan sponsor may transfer all of its duties to another entity, which may obtain investment recommendations from 3(21) fiduciaries such as independent brokers.
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