3(21) Fiduciary vs. 3(38) Fiduciary: What’s the Difference?

Being a business owner is typically conceived from one’s vision and hard work.  Once you realize the dream of starting a business, the collateral duties begin.  To attract employees in today’s competitive job market, one of the key components is having a 401(k) plan for employees.  How does that work?  How much does this cost?  What is my liability as a business owner?

When I was a young child, my family took an extended Easter spring road trip throughout Colorado. Coming from rural Wisconsin, this land seemed to be beautiful and foreign at the same time. One of my most vivid memories of the trip was driving through the majestic canyons that were carved by wild creeks and rivers flowing from the top of the Rockies, followed by seeing people in yellow rafts going down the rapids.  I remember thinking to myself that those guys were crazy, but having the time of their life.  Now that I call Colorado home and have since gone down those rivers myself, I realize the risk and reward of the adventure.

Now imagine going down that raging river in a raft by yourself, with just a professional guide shouting instructions to you from the shore! Guess that’s better than nothing; However, that person can only shout instructions and its up to you to listen.  In the end, you are in control and it would be your doing if you were to be whitewater swimming.

The raft behind you has the guide in the raft barking instructions and directly navigating the raft with the passengers’ help.   If the raft were to overturn, the guide would be in the same situation and their first instinct would be to pull the other passengers from the water.

The prior two examples demonstrate the difference between liability protection as a 3(21)  and 3(38) fiduciary to a 401(k) plan.   Lawyers in recent years have created a cottage industry, targeting employers for having unsuitable investment options in their company sponsored retirement plan.

By hiring a 3(21) fiduciary to advise on your plan, you are taking steps to limit liability, as you have hired an RIA firm to provide recommendations with your investment choices.   However, under this arrangement, it is still the plan sponsor’s ultimate decision.  Alternatively, a 3(38) fiduciary will provide you with the utmost fiduciary protection available under the IRS code.  A 3(38) fiduciary has full discretion over the investment lineup and does not need the plan sponsor’s approval to make changes.

Anytime you enjoy the sport of whitewater rafting, there is always a chance to participate in the sport of whitewater swimming.  During such events, it sure would be nice to have a guide in the water with you.

When it comes to a plan sponsor’s liability to a 401(k) plan, would you rather have a guide on the shore or in your boat navigating potential hazards and rapids?

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