Why Your 401(k) Needs a 3(38) Fiduciary

If you sponsor a 401(k) plan, you are a fiduciary. That means you have a legal obligation to act in the best interest of your plan participants. And if something goes wrong — the wrong funds, excessive fees, a compliance failure — the liability falls on you.

Most business owners don't realize this until it's too late. And the advisor they hired? In most cases, that advisor is only sharing fiduciary responsibility with you, not taking it off your plate entirely.

The distinction comes down to two numbers defined under ERISA: 3(21) and 3(38). Understanding the difference is one of the most important decisions you'll make for your plan.

The 3(21) Advisor: Shared Responsibility

A 3(21) fiduciary advisor recommendsinvestments for your plan. They provide guidance. They give you a list of suggested funds. But here's the critical detail: you or your investment committee must approve those recommendations. And because you made the final decision, you retain the fiduciary liability.

Think of it this way: a 3(21) advisor is like a consultant who gives you advice, but you sign the contract. If that advice turns out to be wrong, you're both on the hook.

Many 401(k) advisors serve in a non-discretionary 3(21) capacity, sharing fiduciary responsibility rather than assuming it — meaning the ultimate liability for investment decisions stays with you.

The 3(38) Investment Manager: Full Accountability

A 3(38) investment manager is fundamentally different. Under this arrangement, the fiduciary assumes full legal responsibility for selecting, monitoring, and replacing plan investments. They don't just recommend — they decide. And the liability for those investment decisions transfers from you to them.

This means your investment committee is protected. Your HR team is freed up. And you can focus on running your business, knowing that a qualified professional has taken on the legal burden of managing your plan's investments.

Why This Matters More Than You Think

Retirement plan litigation has escalated sharply. According to Encore Fiduciary's annual ERISA litigation report, plaintiff law firms filed 155 fiduciary class-action lawsuits in 2025 — a near-record high — and more than 600 excessive-fee and imprudent-investment suits against defined-contribution plans over the past decade. While these cases have historically concentrated on the largest plans, plaintiff firms are increasingly filing against mid-size plans. Separately, the U.S. Department of Labor remains an active enforcer: its Employee Benefits Security Administration recovered $1.4 billion and closed 878 civil investigations in fiscal year 2025.

With a 3(21) advisor, you need to be able to demonstrate that your investment committee diligently reviewed every recommendation, understood the rationale, and made informed decisions. That's a significant ongoing burden for business owners who already have full plates.

With a 3(38) investment manager, that burden is transferred. The manager must maintain documentation of their investment process, and they bear the legal responsibility if challenged.

What to Look For in a 3(38) Fiduciary

Not all 3(38) fiduciaries are created equal. When evaluating an investment manager for your plan, consider:

• Independence: Are they fee-only, or do they receive commissions or revenue-sharing payments from fund companies? Conflicts of interest undermine the entire purpose of fiduciary management.
• Research-driven process: How do they select funds? Is their process grounded in evidence and academic research, or are they simply following industry trends?
• Transparency: Can they clearly explain their fees, their investment methodology, and their monitoring process?
• Ongoing monitoring:Investment selection isn't a one-time event. Your fiduciary should continuously monitor fund performance and replace underperformers.

The Bottom Line

As a plan sponsor, you have enough on your plate without worrying about whether your 401(k)'s investment lineup could expose you to legal liability. A 3(38) fiduciary doesn't just give you simplified investment management, it gives you peace of mind.

The question isn't whether you can afford a 3(38) fiduciary. It's whether you can afford not to have one.

Sources: ERISA Fiduciary Litigation in 2025: Plaintiff Law Firms Continue the Frenetic Pace — Encore Fiduciary, Feb 9, 2026; EBSA Restores $1.4 Billion to Employee Benefit Plans, Participants, and Beneficiaries (FY 2025) — U.S. Department of Labor.