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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.

By Kelly Chambers

Updated Apr. 30, 2026 |

3(21) vs. 3(38) fiduciaries: A guide for advisors Apr 30, 2026 4:15:27 PM 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.

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.