Shared Responsibility, Stronger Governance
Many plan sponsors choose to outsource investment fiduciary responsibilities to an experienced registered investment advisor. Doing so can improve governance, provide specialized expertise and reduce the internal burden of overseeing plan investments. However, it’s important to note that while outsourcing investment fiduciary responsibilities reduces a plan sponsor’s fiduciary burden, it does not eliminate it.
Understanding 3(21) and 3(38) Services
Under an Employee Retirement Income Security Act of 1974 (ERISA) Section 3(21) arrangement, the investment advisor acts as a co-fiduciary, providing recommendations on the plan’s investment lineup. The plan sponsor retains final decision-making authority and is responsible for accepting or rejecting those recommendations.
Under an ERISA Section 3(38) arrangement, the advisor assumes discretionary authority to select, monitor and replace investment options on the plan’s behalf. Because the advisor makes the investment decisions, the plan sponsor transfers a greater degree of investment fiduciary responsibility than under a 3(21) arrangement.
Your Responsibilities Don’t End
Whether your plan uses a 3(21) or 3(38) fiduciary, ERISA requires plan sponsors to prudently select and monitor their service providers. In other words, fiduciary oversight shifts — it doesn’t disappear. Sponsors should periodically evaluate whether the advisor continues to provide quality service, appropriate investment oversight, timely communication and documentation of its fiduciary process. Reviewing service agreements, understanding the advisor’s scope of responsibility and confirming appropriate fiduciary acknowledgments are also important governance practices.
Best Practices for Ongoing Oversight
Effective monitoring doesn’t have to be complicated, but it should be consistent. Consider scheduling regular review meetings, documenting discussions in committee minutes, reviewing investment reports and benchmarking data, evaluating responsiveness to participant and sponsor needs and periodically confirming that fees remain reasonable for the services provided. If your organization has an investment committee, ensure members understand the advisor’s responsibilities as well as the committee’s own ongoing oversight obligations.
Outsourcing investment fiduciary services is an effective way to strengthen a retirement plan’s governance framework. By selecting qualified fiduciary partners — and continuing to monitor their performance — plan sponsors can fulfill their own fiduciary responsibilities while benefiting from professional investment expertise.
Strengthen Your Fiduciary Oversight with TRA
Navigating fiduciary responsibilities can be complex, even when investment duties are outsourced. TRA helps plan sponsors enhance governance through comprehensive retirement plan administration, fiduciary support, compliance guidance and ongoing plan oversight.
