ERISA Section 3(38) Investment Managers: What Business Owners Need to Know

How Louisiana employers can shift fiduciary liability and improve retirement plan outcomes

 

KEY TAKEAWAYS

  • ERISA imposes fiduciary duties on plan sponsors, including the duty to prudently select and monitor investments.
  • A Section 3(38) investment manager assumes discretionary authority and shifts fiduciary liability from the employer.
  • A Section 3(21) advisor provides advice but leaves final decision-making — and liability — with the plan sponsor.
  • Failing to meet ERISA fiduciary obligations can result in personal liability for plan losses.
  • WealthHarbor Capital Group serves as a 3(38) fiduciary for qualified plans throughout Louisiana.

 

Sponsoring a 401(k) or other qualified retirement plan is one of the most valuable benefits a business can offer employees. It is also one of the most legally complex. Under the Employee Retirement Income Security Act of 1974 (ERISA), plan sponsors — typically the business owner or a designated committee — bear significant fiduciary responsibility for the investments offered in the plan. Many employers do not fully appreciate the scope of this liability until something goes wrong. An ERISA Section 3(38) investment manager can help transfer a significant portion of that responsibility to a qualified professional.

Understanding ERISA Fiduciary Duties

Under ERISA, any person or entity that exercises discretionary authority or control over a retirement plan’s assets is considered a fiduciary. Plan sponsors — the employers who establish and maintain the plan — are automatically fiduciaries. As fiduciaries, they are required to:

Act solely in the interest of plan participants and their beneficiaries. Carry out duties with the care, skill, prudence, and diligence of a prudent expert. Diversify plan investments to minimize the risk of large losses. Follow the terms of the plan document. Pay only reasonable plan expenses.

Failure to meet these obligations can result in personal liability for plan losses, excise taxes, and regulatory enforcement actions.

Section 3(21) vs. Section 3(38): The Critical Distinction

ERISA provides two pathways for engaging an outside investment advisor to assist with plan investments:

A Section 3(21) co-fiduciary provides investment recommendations and advice, but the plan sponsor retains decision-making authority and co-fiduciary liability. If the sponsor implements the advisor’s recommendation and it proves imprudent, the sponsor may still bear liability.

A Section 3(38) investment manager, by contrast, is granted full discretionary authority to select, monitor, and replace plan investments. By accepting this discretionary role in writing, the 3(38) manager shifts fiduciary liability away from the plan sponsor for investment decisions. The sponsor retains the duty to prudently select and monitor the 3(38) manager, but is no longer personally liable for the investment decisions the manager makes.

Who Should Consider a 3(38) Investment Manager?

A 3(38) arrangement is particularly valuable for:

  • Small to mid-sized business owners who lack the time, expertise, or resources to prudently monitor plan investments.
  • Companies that have experienced turnover in their plan committee or HR leadership.
  • Employers whose current plan advisor has not clearly defined their fiduciary role in writing.
  • Organizations that want to reduce the risk of participant lawsuits related to plan investment performance.
  • Business owners approaching the sale of their company who want clean fiduciary documentation.

WealthHarbor’s Approach to Retirement Plan Fiduciary Services

WealthHarbor Capital Group offers Section 3(38) investment management services for qualified retirement plans, including 401(k), 403(b), and defined benefit plans. Our team has extensive experience navigating ERISA requirements and helping Louisiana businesses design plans that serve both employer and employee interests.

We work with plan sponsors to design an Investment Policy Statement (IPS), select and monitor a prudent investment menu, conduct regular fund performance reviews, and document all fiduciary decisions in compliance with ERISA requirements.

 

Ready to Take the Next Step?

If you sponsor a retirement plan and are unsure about your fiduciary obligations or the role your current advisor plays, WealthHarbor Capital Group can provide a complimentary plan review. Contact us to schedule a consultation with our retirement plan specialists.

WealthHarbor Capital Group
433 Metairie Road, Suite 500 | Metairie, LA 70005
Phone: 504-482-1962 | Email: info@wealthharbor.com
Website: www.wealthharbor.com