Offering a small business retirement plan is a great thing to do for your employees. But if you’re the business owner, you might also be exposing yourself to liability risk.

Under federal law, it’s your responsibility to make sure the plan is managed appropriately and meets the requirements spelled out in the Employee Retirement Income Security Act (ERISA). In particular, the plan must offer prudent investment options with reasonable fees. Plans that don’t can result in participant lawsuits. And, if the plan sponsor, business owner, or administrator is found to have failed to meet ERISA obligations, they can be held liable in a court of law.

For these reasons, more businesses are looking for outside help meeting the legal obligations for their retirement plans. That help comes in the form of an investment fiduciary.

Read on to learn about one type of fiduciary, a 3(21) investment fiduciary. We’ll discuss what 3(21) investment fiduciaries do, what they don’t, and how they differ from the other type of investment fiduciary you may be considering.

What Is an Investment Fiduciary?

When employees invest in a retirement savings plan, they’re placing their trust in the people sponsoring and managing that plan. First and foremost, they trust that the person setting up the plan and selecting investment options is acting in the employees’ interests—not their own. But what’s to stop someone from abusing that trust? To answer that question, Congress passed ERISA in 1974.

ERISA spells out clear rules to make sure that people setting up and managing retirement plans are behaving appropriately. It also defines the person who is responsible for making sure that the plan follows ERISA rules: the fiduciary. What you might not realize, however, is that if you haven’t hired someone to act as investment fiduciary for your retirement plan, then the person who bears that fiduciary responsibility is you.

Acting as the fiduciary for a retirement plan can carry significant administrative obligations as well as legal liability if the plan doesn’t follow all ERISA rules. Today, more small businesses are taking the simplest, safest approach: delegating the investment fiduciary role to a third party.

Types of Investment Fiduciaries

ERISA defines different types of investment fiduciaries, but the two most common are 3(38) and 3(21). (The numbers come from the different sections of the ERISA law that defines those roles.) The difference between those two types of investment fiduciaries boils down to the amount of control (and liability) they have over the plan.

ERISA 3(38) Investment Fiduciary Responsibility

If you want to offload almost all fiduciary responsibilities for your plan, you want a 3(38) investment fiduciary. In this scenario, the 3(38) investment fiduciary formally takes on the role of fiduciary for your retirement plan. They build the investment lineup. They continually monitor the plan to make sure it meets or exceeds ERISA guidelines. In addition, they maintain investment fiduciary liability insurance over the plan. If a lawsuit ever arises, they bear the legal liability—not you or your business.

If you think a 3(38) investment fiduciary makes the most sense for your business, Ubiquity can help. We offer simple, low fee 401(k) plans with built-in 3(38) investment fiduciary services through our partner, Counsel Trust.

Limited Scope 3(21) Investment Fiduciary

With a 3(38) investment fiduciary, the business owner or plan sponsor can’t make any decisions about investment lineups or other details of the retirement plan—the 3(38) investment fiduciary handles everything.  Some business owners, however, want to have more say in those choices. If that sounds like you, then you may want to consider a 3(21) investment fiduciary—also called a limited scope 3(21) fiduciary, or just a 3(21) advisor.

A 3(21) investment fiduciary is a financial expert who has met the fiduciary qualifications defined by ERISA. The fiduciary works for a fee under a “co-fiduciary agreement.” If you work with a financial advisor for your retirement plan, for instance, that advisor may offer a 3(21) advisor service.

A 3(21) investment fiduciary shares the fiduciary responsibilities for the plan. For example, they may do the work of selecting the investment lineup and continually monitoring the plan to make sure it meets ERISA guidelines. However, under this arrangement, the 3(21) investment fiduciary is only making recommendations and carrying out the plan sponsor’s wishes. The sponsor can accept or reject them. The plan sponsor or business owner retains ultimate decision-making responsibility for the plan. So, if a lawsuit ever arises, the business owner will still bear legal liability if the plan is found to have fallen short of ERISA requirements.