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3(21) vs. 3(38) fiduciaries: A guide for advisors
3(21) vs. 3(38) fiduciaries: A guide for advisors Understanding the difference between 3(21) and 3(38) fiduciary status isn't just compliance knowledge—it shapes how you structure client engagements and manage your liability. If you advise retirement plans, your fiduciary designation isn't just a label—it determines your liability, your authority, and how your clients can work with you. Yet many advisors operate under a 3(21) or 3(38) designation without fully examining whether it's the right fit for a given engagement. The difference between 3(21) and 3(38) comes down to one central question: Who has the final say on investment decisions? That single distinction cascades into different liability structures, documentation requirements, and sponsor relationships. This guide breaks both roles down from the advisor perspective. We cover what each designation means for your practice, when each structure makes sense, and where the compliance risks hide when the two get confused. What ERISA actually says about investment fiduciaries Before diving into the differences, it helps to understand where these designations come from. Both 3(21) and 3(38) are defined in the Employee Retirement Income Security Act of 1974 (ERISA)—and both carry fiduciary duty, just in different ways. Key ERISA concepts to know: Fiduciary status: Anyone who exercises discretionary authority or control over plan assets, renders investment advice for compensation, or has discretionary authority over plan administration is considered a fiduciary under ERISA. De facto fiduciary status: Even if your agreement doesn't call you a fiduciary, ERISA may treat you as one based on what you actually do, not what your contract says. Co-fiduciary liability: A plan can have multiple fiduciaries with overlapping responsibilities. Each is liable for their own breaches and, in some cases, for the breaches of others they knowingly allow. 3(16) administrators: A separate fiduciary role focused on operational and compliance duties, not investments. We'll cover this briefly in a later section. Why this matters to your practice If you're providing investment guidance to a plan without a clearly defined fiduciary role in writing, you may already carry liability you haven't formally accepted. ERISA looks at function, not just labels. 3(21) fiduciary: The co-advisor role A 3(21) fiduciary is a co-fiduciary who provides investment recommendations, but leaves final decision-making authority with the plan sponsor. What you do as a 3(21) advisor: Analyze the plan's investment lineup against objectives and the investment policy statement (IPS) Recommend additions, replacements, or removals from the fund menu Document your rationale for every recommendation Attend investment committee meetings and advise on fund performance Monitor the lineup and flag underperformers, but do not act unilaterally What the plan sponsor retains: Final authority over which funds are selected, retained, or removed Fiduciary liability for the investment decisions they make based on your advice The duty to act prudently on the recommendations you provide Your liability as a 3(21): You are still a co-fiduciary, which means you can be held liable for imprudent recommendations, even though you don't make the final call. The sponsor's liability doesn't insulate you from your own. 3(21) works best when: The sponsor has an active investment committee with sufficient expertise to evaluate recommendations The plan has a strong governance infrastructure: documented meetings, a current IPS, and clear decision-making processes The sponsor wants an engaged advisory relationship but prefers to remain in control 3(38) fiduciary: the discretionary manager role A 3(38) fiduciary is an investment manager who assumes full discretionary authority over plan assets. You don't recommend—you decide, implement, and act, without requiring sponsor approval for each investment change. What you do as a 3(38) manager: Select, monitor, and replace plan investment options at your discretion Execute fund changes without having to go through a sponsor approval process Manage the investment lineup to meet plan objectives and IPS guidelines Provide regular performance reporting to the plan sponsor and committee What falls under your remit: Fiduciary liability for investment decisions, with the sponsor being relieved of liability for the choices you make Responsibility for acting prudently, with care, and in the best interest of plan participants Documentation, which includes the written 3(38) agreement, quarterly reviews, and scope of authority What the plan sponsor still owns: Liability for hiring you as the 3(38) manager The duty to monitor you in your role as 3(38) manager 3(38) works best when: The sponsor has limited internal investment expertise or a small, informal committee The plan sponsor's primary goal is to minimize personal fiduciary exposure You have the systems, infrastructure, and capacity to manage investment decisions efficiently across multiple plans 3(21) vs. 3(38) at a glance This table is a quick reference to help evaluate which structure fits a given engagement. You can use this table when talking with a plan sponsor client about their decision. Comparing 3(21) and 3(38) fiduciaries DIMENSION 3(21) FIDUCIARY 3(38) FIDUCIARY ERISA Reference Section 3(21)(A)(ii) Section 3(38) Fiduciary Type Co-fiduciary / Investment advisor Investment manager (discretionary) Discretion level Non-discretionary Advisor recommends and sponsor decides Full discretion Manager selects and implements independently Who decides Plan sponsor retains final decision-making authority 3(38) manager makes all investment decisions Liability transfer Shared with the advisor and sponsor both carry fiduciary duty Shifted with investment liability moved to the 3(38) manager Sponsor still owns Full investment decision liability Duty to prudently select and monitor the 3(38) manager Advisor liability Yes, for imprudent recommendations Yes, for imprudent exercise of discretionary authority Documentation needs IPS alignment, meeting minutes, recommendation rationale Written 3(38) agreement, scope of authority, performance reviews Best if sponsor… Has active committees with investment expertise and governance resources Seeks liability relief with minimal day-to-day involvement Advisor role Analyze, recommend, document — but not decide Select, implement, and replace funds independently How to determine which role fits your engagement Choosing between 3(21) and 3(38) isn't just a client preference question; it's a practice management decision that touches your liability, your workflows, and your infrastructure. Here are four factors to work through for any new plan engagement: 1. What is your firm's appetite for discretionary liability? Taking on a 3(38) role means the liability for investment decisions follows you. Before assuming that role, confirm that your E&O insurance covers discretionary investment management for ERISA plans, and that your compliance team is aligned. 2. How sophisticated is the sponsor's governance structure? A 3(21) relationship requires the sponsor to have the bandwidth and competency to evaluate your recommendations and make informed decisions. For sponsors with thin committees, limited documentation habits, or minimal investment expertise, that's a real risk — both for the plan and for you. 3. What's the plan's size and complexity? Larger plans with diverse investment menus and active participant engagement may benefit from the rigor of a co-advisory 3(21) relationship. Smaller plans—or sponsors stretched across multiple responsibilities—might be better served by a 3(38) structure that takes the decision-making burden off their plate. 4. Does your current engagement agreement match how you actually operate? This is the most overlooked question. If your agreement says 3(21) but you're effectively making investment decisions without sponsor sign-off, you may be operating as a de facto 3(38)—without the formal agreement that would govern that liability transfer. Compliance check If your agreement and your actual conduct don't align, that gap creates legal exposure for you and your client. Before taking on new plan clients, or reviewing existing ones, have your compliance team audit your engagement agreements against how you're actually operating. A quick note on 3(16): The third fiduciary role You'll often hear 3(16) mentioned alongside 3(21) and 3(38). It's worth understanding the distinction so you can have a complete conversation with plan sponsors about how fiduciary responsibility is distributed across their plan. Here's how the three roles divide responsibilities: 3(21): Investment advice and recommendations—co-fiduciary, non-discretionary 3(38): Investment management—discretionary authority, full liability transfer for investment decisions 3(16): Plan administration—Form 5500 filing, required notices, enrollment, compliance documentation A 3(16) plan administrator handles the operational and compliance side of running the plan, not the investment side. Many plan sponsors don't realize they're personally liable for these administrative duties until they're facing a DOL audit or a missed filing deadline. Advisors who can offer—or refer out—3(16) support are providing more complete coverage to their plan clients. Betterment Advisor Solutions supports both 3(21) and 3(38) fiduciaries Betterment Advisor Solutions is built for advisors who are serious about growing a retirement plan practice—not just adding plans, but running them efficiently, compliantly, and at scale. Whether you operate as a 3(21) or 3(38), the Betterment Advisor Solutions platform gives you: A modern advisor platform designed for managing multiple plans with minimal administrative overhead 3(16) administrative services that handle the operational burden—so neither you nor your client carries unnecessary compliance exposure Digital onboarding and participant enrollment tools that can reduce setup friction for new plans Investment management infrastructure that supports discretionary models without requiring you to build it from scratch Clear documentation and reporting to support fiduciary governance—regardless of which role you hold The right fiduciary structure for your clients starts with having the right infrastructure behind your practice. Betterment Advisor Solutions makes it practical—not just possible—to take on more plan clients while maintaining the quality of service your clients expect. Ready to build a more scalable retirement plan practice? Explore Betterment Advisor Solutions. Frequently Asked Questions Q: Am I automatically a fiduciary if I advise a 401(k) plan? Not necessarily. Fiduciary status under ERISA is determined by function, not title. If you're providing individualized investment advice for compensation, exercising discretion over plan assets, or rendering investment recommendations on an ongoing basis, you may be a fiduciary regardless of how your agreement is written. If you're unsure of your status, have your compliance team review both your engagement agreements and your actual conduct. Q: What's the difference between a 3(21) and 3(38) fiduciary? A 3(21) is a co-fiduciary who provides investment recommendations—the plan sponsor retains final decision-making authority and the associated fiduciary liability. A 3(38) is a discretionary investment manager who selects and implements investment decisions independently, shifting investment-related liability away from the sponsor. The key distinction is who has final decision-making authority—and who bears the consequences. Q: Can I serve as a 3(38) fiduciary if I'm an RIA? Yes — registered investment advisers can serve as 3(38) investment managers for ERISA plans, provided the service is within the scope of their investment adviser registration and is clearly outlined in a written investment management agreement with the plan. Many RIAs serving as 3(38) managers also confirm that their E&O coverage extends to discretionary management of ERISA plan assets. Q: What happens if my agreement says 3(21) but I'm making discretionary decisions? This is a significant compliance risk. ERISA looks at function, not just the language in your contract. If you're exercising discretion over investment selections—even informally—you may be treated as a 3(38) investment manager without the formal agreement that governs that liability transfer. That gap can expose both you and your client. If this describes your current practice, review your agreements with legal counsel promptly. Q: How does a 3(16) fiduciary differ from 3(21) and 3(38)? A 3(16) plan administrator is responsible for the operational and compliance side of running the plan—filing Form 5500, distributing required participant notices, managing enrollment, and maintaining plan documentation. It's a distinct role from the investment-focused 3(21) and 3(38) designations. Many plan sponsors are personally serving as their own 3(16) administrator without realizing the liability exposure that carries. Betterment Advisor Solutions offers 3(16) administrative services that can offload that burden from the sponsor—and from you.
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Advisor Spotlight: Katelyn Bombardiere, Commas
Advisor Spotlight: Katelyn Bombardiere, Commas For this Advisor Spotlight, we welcome Katelyn Bombardiere, CFP®, a Financial Planner at Commas, to chat about her passion for helping the everyday investor. Advisor: Katelyn Bombardiere Firm: Commas Bio: Katelyn Bombardiere, CFP®, is a Financial Planner at Commas, a fee-only financial planning firm based in Cincinnati. Katelyn started her career in the high-net-worth wealth management industry where she quickly realized her passion for helping the "everyday" investor. She sought a different approach to help people (like her friends, family and peers) without worrying about asset minimums. Firm Bio: We all don't have millions of dollars—but we all have goals. Commas is a financial advisory that provides fee-only service to the EveryInvestor: those who might not fit the standards set by traditional high-net-worth advisories but still deserve personalized financial guidance to meet their goals. We offer services with no account minimums, working with our clients at every step of the process and empowering them to create, plan, and achieve their desired money goals. We Are: Encouraging: 0% Judgment Trustworthy: Certified, Not Stuffy Purposeful: Fee-only for All Approachable: We Wear Jeans Why did you decide to become an advisor? As a sophomore in college, I was fortunate enough to go on a trip through the Leeds School of Business at The University of Colorado at Boulder. This trip took a group of students to over 10 different financial firms to introduce them to the possibilities of careers in finance. It was on this trip that I declared my major as finance and figured out that I wanted to be a wealth advisor. From there, I pivoted my internship and career choices to pursue my goal of becoming an advisor. What are some questions that you wish more clients would ask, and why? I think it is important for people who are looking for an advisor to know: if the advisor they are talking to is a fiduciary how that advisor is getting paid the investment philosophy and financial planning process the advisor follows what the advisor's qualifications are. I think gauging a sense of the advisor's passion is important too. You want to work with someone who is passionate about what they do, continues to learn, and shows an interest in you. What do you think is the biggest mistake people make with their money? Either they don't save enough, or they save but don't invest. Another big mistake is not understanding the difference between long-term investing in well-diversified funds and day trading. What does your firm's current tech stack look like? How has technology impacted your work? We utilize Betterment Advisor Solutions as our custodian and Right Capital as our financial planning software. We have created our own CRM platform using Airtable which is a zero code cloud spreadsheet database. This tool allows us to customize our own portal where we house client data, tasks, meeting notes, and the client ledger (types of accounts, where they are held, contributions, notes, etc.). What makes Commas unique, however, is our internal automations through Zapier. For example, after our introduction meeting, the prospect is automatically sent an email with the next steps (signing up for our fee, completing a questionnaire and opening a Betterment account with our client agreements). Once they complete that step they are automatically sent another email asking them to upload documents to our secure portal. Those documents then file themselves into the correct client folder. The clients are then prompted to schedule our discovery meeting. This process continues all the way through the client onboarding process, and even when it comes time for generating annual reviews. These automations are what allows us to service our clients more successfully. They decrease the time we spend on busy work—account opening paperwork, filing documents, creating review outlines, sending template emails, etc.—and increase the amount of time we get to meet with clients and work on their financial plans. How have the recent trends toward remote and hybrid work impacted your relationship with clients? The remote work trend has only strengthened our client relationships as we were already well equipped from a technology standpoint. Our client meetings are generally 30 minutes to an hour, which is on the shorter side when looking at some other wealth management firms. I think our clients like the ability to have a quick meeting and get back to their day. They are just as busy as we are! This also allows us to work with clients all across the country. What do you think is the biggest opportunity for advisors today? To work with the everyday investors and show them that they are qualified to work with an advisor. You don't have to have thousands or millions of dollars to get good financial advice from a trustworthy source. This is also an opportunity to prove that fiduciary financial advisors are trustworthy professionals, not shifty sales people. If you won the lottery, what would you do with the money? Treat myself to a nice international vacation, set aside some funds for my closest friends and family (as long as they invest it for their futures), and invest the rest to ensure that I can attain all of my goals and retire comfortably. If you could only give one piece of financial advice, what would it be? If you are young, start investing today—even if it is $10/month! If you are older, still get started today! I also can't help but advise that you talk to a financial advisor (fiduciary!). Every single person's financial situation is different, and having the peace of mind that you are on track is so powerful. Yes, you can absolutely do this on your own, but do you have the time or passion to do it? Will you be 100% confident in your choices? If you are sick, you go to the doctor. If you have a toothache, you go to the dentist. If you have finances to manage (spoiler alert we all do), why not talk to a financial advisor?
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Client Agreement Automation
Client Agreement Automation Everything you need to know about this great feature. Scroll down to learn more and read our legal disclosures. The Betterment Advisor Solutions Client Agreement Automation function will make onboarding your new clients fast, easy, and completely paperless. By permitting your clients to execute your firm’s advisory agreement as part of the white-labeled Betterment Advisor Solutions signup experience, you automate a manual process, giving you more time to focus on your business while providing your clients with a better experience. How to get started You may need to update your Form ADV Part 2A and most likely your Client Agreement to reflect the incorporation of Betterment Advisor Solutions into your practice, including (among other things) how your firm uses Betterment’s sub-advisory and brokerage services, and Betterment’s fees. Since each situation is unique, please consult with your attorney or compliance officer. About the Client Agreement Automation function The Client Agreement Automation function gives you the option to have your clients electronically execute your firm’s advisory agreement as part of the white-labeled onboarding experience. It also will permit you to provide your Form ADV Part 2A, Form CRS, and privacy policy to your clients at the time of onboarding. Additionally, each advisor on the platform may supply their Form ADV Part 2B if they choose to do so. This will be presented to their clients at the time of onboarding alongside the other documents that may be supplied at the firm level. Provision of the Form ADV Part 2B is optional, and can be implemented even if your firm does not supply any of the other agreements or disclosures. Use of the Client Agreement Automation function is optional. If you choose not to use the function or to provide only a subset of your firm documents, you will need to separately execute your agreements between your firm and your clients and deliver firm disclosures in a manner determined by you outside of the Betterment Advisor Solutions platform. The Client Agreement Automation function is only intended to assist firms in presenting agreements and disclosures associated with account openings. Subsequent updates to these documents are not re-delivered to existing clients; the firm must make their own arrangements to deliver any such updates. Note that firm admins may upload a revised Form CRS outside of the account opening process, which will prompt a confirmation modal for client acknowledgment; however, no such capability exists for other agreement types. For all other document updates, the firm retains sole responsibility for arranging delivery to existing clients through appropriate means outside of this function. Contact us with questions at support@bettermentadvisorsolutions.com. How Client Agreement Automation works Overview: The Client Agreement Automation allows your firm to provide a form advisor agreement, Form ADV Part 2A, Form ADV Part 2B, Form CRS and privacy policy to Betterment, which Betterment will then host. As part of the Betterment Advisor Solutions client signup, Betterment will electronically deliver these documents to your clients. For your firm’s Client Agreement, you have the option to enable DocuSign to collect a visible electronic signature from your client—including their name and date — which will also appear on the downloaded PDF. Your Form ADV Part 2A, Form ADV Part 2B, Form CRS, and privacy policy will use checkbox consent, which permits your clients to click a checkbox indicating their consent. DocuSign is only supported for Client Agreements. You have the option of providing only a subset of the documents listed above, though you must provide an advisory agreement to use this function. Only those documents which you upload to your firm dashboard will be provided to clients. Signup: As part of the Betterment Advisor Solutions electronic signup process, your clients are presented with agreements between them and Betterment, and acknowledge receipt of Betterment’s disclosure documents. If you elect to use the Client Agreement Automation function, your clients are also presented with your firm’s advisory agreement and any disclosure documents you have uploaded as of the date each client signs up. If you have enabled DocuSign, your client will electronically sign and date your Client Agreement, which will be visible on the downloaded PDF. If DocuSign is not enabled, your client will need to consent to the terms of your Client Agreement electronically, by checking a box and clicking a button to agree to create their account. Please note, Betterment does not collect traditional handwritten signatures for your agreement or the Betterment Advisor Solutions agreements. Instead, consent is indicated electronically, and the date and time of such consent is recorded and stored. For all other firm documents—Form ADV, Form CRS, and privacy policy—clients indicate consent via checkbox. This flow applies during the initial client onboarding and when a client opens a new legal account, provided they have not already signed the most recent version of your firm’s agreement. Records: In the advisor dashboard, under the “Agreements” tab, you can access the "Client packages" window to view which clients executed your firm’s agreement electronically, the date and time at which they did so, and a digital copy of the version they executed (along with the versions of the firm’s Form ADV Part 2A, Form CRS and privacy policy, and the advisor’s Form ADV Part 2B, provided these documents were uploaded at the time the client was onboarded). You can also download all client packages in bulk. Each agreement package includes your firm’s Client Agreement—with a visible DocuSign signature if you have DocuSign enabled—along with any firm disclosure documents you have uploaded, such as your Form ADV, Form CRS, and privacy policy, which reflect checkbox consent. Note that Betterment’s own agreements are not included in these packages. The most up-to-date version of Betterment’s Client Agreement is available here and other disclosures are here. Important considerations for your firm Please review these items carefully before deciding whether or not to use the Client Agreement Automation function. The Client Agreement Automation function supports one of each disclosure document type per firm at a time—one Form ADV Part 2A, one Form CRS, and one privacy policy. You may update these at any time by having a firm admin upload a new copy via the Agreements section of the portal. Once updated, the new version will be presented to all new clients going forward, but will not be redistributed to existing clients. If you choose to enable DocuSign for your Client Agreement, it will apply to all clients you bring onto Betterment going forward. Your Form ADV, Form CRS, and privacy policy will continue to use checkbox consent and are not affected by DocuSign enablement. Form ADV Part 2B: Each individual advisor on the platform may upload their own ADV Part 2B if they choose or if their firm directs them to do so. If a Form ADV Part 2B is present when a client signs up, a record of the acknowledgement of receipt of the Form ADV Part 2B and a copy thereof will be presented on the Agreements page as well as in the Compliance view, alongside firm-level agreements (if supplied). Form CRS: When present, the Firm’s Form CRS will be shown as the first disclosure alongside the other documents and disclosures during client onboarding that are a part of the Client Agreement Automation function. In addition to client onboarding, the Firm’s Form CRS is presented to clients when adding additional services, including when the client opens a new type of account, on the client consent form when the advisor initiates the opening of a new type of account, when a rollover is initiated by a client, on the client consent form when the advisor initiates a rollover, on quarterly statement notifications, and when a user logs in for the first time since the Firm has uploaded or updated their Form CRS. Examples of opening a new type of account include when a client with a taxable investing account opens an individual retirement account or when a client with an individual retirement account opens a joint account. Fee changes: When considering whether to use the Client Agreement Automation function, you should take into account that advisors have the ability to change the fees they charge specific clients in the advisor dashboard (subject to available Billing Plans, which can only be created by firm admins.) Before using the function, you should determine how, if at all, this impacts the structure of your agreements. Always on: If you decide to use the Client Agreement Automation function, it will be turned on for all clients you bring to Betterment Advisor Solutions. Please note, however, that DocuSign is not available for clients transitioning to your firm from Betterment's retail or 401(k) platforms. Clients moving from these platforms will instead execute your firm's advisory agreement via checkbox consent through the Client Agreement Automation function. Multiple signatories: Currently, the Client Agreement Automation function does not support accounts with multiple signatories, such as trusts with multiple trustees and joint accounts. With joint accounts, each individual account holder will sign their own separate agreements. Agreement amendments: While agreements can be updated and will go live for future client onboarding, we do not support amendments to your agreements with existing clients on our system. If you would like to amend your agreement with some of your clients, you will need to do so yourself, using whatever non-Betterment mechanism and recordkeeping system you deem appropriate. Form ADV Part 2A, Form CRS, and privacy disclosure updates: While Form ADV Part 2A and privacy disclosures can be updated and will go live for subsequent client onboarding, we will not send any updates to your Form ADV Part 2A or privacy disclosures to your existing clients. You are responsible for complying with SEC rules governing when and how to deliver any required disclosures and amendments to these documents to your clients.
