How to Choose the Right Fiduciary Structure for Your Company Retirement Plan
Every 401(k) plan sponsor is a fiduciary — whether they realize it or not. Here's what you need to know about 3(16), 3(21) and 3(38) fiduciary roles and how to structure your coverage to reduce risk and keep your plan running smoothly.
Running an effective 401(k) plan today comes with significant responsibility — and potential exposure to fiduciary liability.
For retirement plan sponsors, keeping a plan in compliance with the Internal Revenue Code and Employee Retirement Income Security Act of 1974 (ERISA) requirements can be an area of ongoing risk. That's why many seek outside assistance with their administrative fiduciary responsibilities.
When it comes to fiduciary obligations, the distinctions between fiduciary types aren't always obvious. Here are 10 frequently asked questions (FAQs) that offer a quick overview of the fiduciary roles that matter most in keeping your plan compliant.
Q. What is a fiduciary of a 401(k) plan?
A. Simply stated, a fiduciary is anyone who has decision-making authority and control over a retirement plan or its assets. Fiduciaries are held to a high standard of care, acting solely in the interest of plan participants and beneficiaries. That means plan sponsors who aren't aware of their fiduciary obligations, or who don't have the right support structure in place, can be held personally liable for plan decisions that go wrong.
Q. Are there different types of fiduciaries?
A. Yes. Depending on the level of support you need, you can choose from a 3(21), 3(38) or 3(16) fiduciary.
Q. What does a 3(21) fiduciary do?
A. A 3(21) fiduciary serves as a co-fiduciary with the plan sponsor on investment decisions. They provide guidance and recommendations on selecting and monitoring the plan's investment lineup, with the plan sponsor retaining final decision-making authority. This arrangement is well-suited for plan sponsors who want expert support and a layer of fiduciary protection while maintaining control over the investment menu.
Q. What is a 3(38) fiduciary and how is that different?
A. A 3(38) fiduciary is an investment manager who assumes full discretionary authority over the plan's investment lineup, making it a smart option for plan sponsors who want to outsource all investment decisions and associated fiduciary exposure to liability. They select, monitor and replace investment options without requiring plan sponsor approval at each step. It's a valuable option for organizations where HR or finance teams lack the time or investment expertise to oversee the plan's portfolio.
The key distinction? With a 3(21), you retain control and shared responsibility; with a 3(38), both are delegated.
Q. What is a 3(16) fiduciary and why does it matter?
A. For added flexibility, plan sponsors can opt to outsource certain plan administrative responsibilities. While 3(21) and 3(38) fiduciaries focus on investments, a 3(16) fiduciary (also called a plan administrator) handles the daily administrative responsibilities of running the plan. This includes employee enrollment, processing distributions, managing compliance testing and ensuring the plan operates according to its governing documents.
An overlooked deadline, a mishandled distribution or a failed compliance test can all trigger monetary consequences and diminish participant trust in the plan. A 3(16) fiduciary takes on those risks and associated potential administrative liability, so you don't have to.
Q. How do I choose the right fiduciary structure for my plan?
A. Start by assessing your team's bandwidth and expertise. If your HR or finance team is comfortable evaluating investment options but wants a second opinion, a 3(21) arrangement may be the right fit. If no one on your team has the time or background to manage the investment lineup, a 3(38) fiduciary can take that off your plate entirely. And if day-to-day plan administration is stretching your internal resources thin, adding a 3(16) can help close that gap. The right structure isn't one-size-fits-all. It should reflect the reality of how your team operates today.
Q. Do I need all three types of fiduciary coverage?
A. Coverage depends on your organization's size, internal resources and risk tolerance. Some plan sponsors are comfortable managing day-to-day administration but want investment support. Others prefer to outsource as much fiduciary responsibility as possible.
Q. Can I use my own third-party administrator alongside my retirement plan provider?
A. Plan sponsors may have the flexibility to work with a third-party administrator (TPA) of their choosing for 3(16) services while maintaining their existing recordkeeping relationship. The goal is to ensure clear lines of communication and responsibility between all parties, so nothing falls through the cracks.
Q. Can I change my fiduciary structure as my company grows?
A. Absolutely. As your organization scales (adding employees, increasing plan assets or expanding benefits, for example) your fiduciary needs will likely evolve too.
A plan sponsor who starts with a 3(21) advisory relationship may eventually move to a 3(38) for full investment delegation. Or a company that once handled administration internally may decide a 3(16) fiduciary makes more sense as compliance demands increase.
It's important to reassess your needs periodically and make sure your structure still matches your team's capacity and your organization's risk profile.
Q. What happens if a fiduciary breach occurs?
A. If a fiduciary fails to act in the best interest of plan participants — whether through negligence, poor oversight or a conflict of interest — the consequences can be serious.
Plan fiduciaries can be held responsible for prohibited transactions involving retirement plan assets, resulting in Internal Revenue Service and Department of Labor excise taxes and penalties. They can also be held personally liable for losses to the plan. . That's one of the strongest arguments for outsourcing fiduciary responsibilities where your organization lacks deep expertise: it shifts potential liability to a qualified third party who's built to manage it.
Closing the gaps in your fiduciary coverage
The right fiduciary structure doesn't just check a compliance box. It gives you confidence that your plan is protected and your participants are being served well.
ADP makes available 3(21) and 3(38) investment fiduciary services along with the flexibility to work with third-party 3(16) providers, so you can build a support structure that fits the way your organization actually operates.
Reach out to an ADP retirement services specialist or call (800) 432-401K for details.
Investment advisory and management services provided through ADP Strategic Plan Services, LLC, an SEC registered investment advisor (SPS). Registration does not imply any level of skill or training. Plan sponsors are responsible for reviewing investment guidelines and tiers and determining that the guideline and tier they select are reasonable and/or suitable, as applicable. The advice provided by SPS is in no way related or contingent upon the payment received for these other services. SPS and its affiliates do not offer investment, tax or legal advice to individuals.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
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