ERISA 3(38) Fiduciaries: How Plan Sponsors Can Shift Investment Liability

Plan sponsors carry heavy responsibility when it comes to the investments in their retirement plans. Under ERISA, selecting, monitoring, and, in some cases, removing investment options are core fiduciary duties. When markets are volatile and litigation risk is high, plan sponsors increasingly look for ways to allocate investment liability without abdicating oversight of their retirement programs. An ERISA 3(38) investment fiduciary can be a valuable resource for managing risk while maintaining prudent stewardship.

What Is a 3(38) Fiduciary?

An ERISA 3(38) fiduciary is an investment professional who has full discretionary authority over plan investment decisions. That means the 3(38) provider selects, monitors, revises, and removes investments on behalf of the plan. Once appointed, the 3(38) fiduciary becomes legally responsible for those investment decisions, relieving the sponsor of liability for that specific function.

Under ERISA Section 3(38), the fiduciary must be capable of exercising independent judgment and acting solely in the best interests of participants and beneficiaries. Not every advisor or TPA can serve in this role—brokers generally cannot, due to the level of discretion required.

3 Key Reasons Why Plan Sponsors Use 3(38) Fiduciaries

ERISA class-action lawsuits and DOL scrutiny over investment lineups have accelerated interest in 3(38) arrangements. Sponsors have three primary motivations:

1. Reduce Investment Fiduciary Risk:
   Selecting and monitoring a menu of investment options is a core fiduciary duty. If the lineup underperforms its peers or has imprudent fees, sponsors can be named in lawsuits. Appointing a 3(38) fiduciary shifts that liability to the investment expert.
2. Tap Professional Expertise: 
   Many plan committees are made up of HR, finance, or operations professionals without deep investment expertise. A 3(38) fiduciary brings dedicated resources, benchmarking capabilities, and institutional knowledge typically unavailable in-house.
3. Strengthen Defense Documentation: 
   Plan sponsors who replace in-house decision-making with a documented 3(38) arrangement create a clearer defense if litigation arises. The record now shows an expert was entrusted with and accepted responsibility for investment decisions.

What a 3(38) Fiduciary Does (and Doesn’t Do)

A true 3(38) fiduciary:

• Has discretionary authority to select, monitor, and remove investments without sponsor approval.
• Conducts ongoing due diligence, including performance reviews, fee benchmarking, and lineup adjustments.
• Documents decisions and rationale in case of audit or litigation.
• Works with the sponsor to align the investment lineup with the plan’s objectives and participant demographics.

A 3(38) fiduciary generally does not:

• Make decisions about plan design (e.g., match formulas, eligibility).
• Manage participant allocations unless they also serve as a 3(21) or as a managed account provider.
• Eliminate the need for sponsor oversight entirely—sponsors are still responsible for selecting, monitoring, and replacing the 3(38) provider.

Plan Sponsor Responsibilities After Appointing a 3(38)

Shifting investment liability doesn’t mean abdicating oversight. Sponsors must:

Carefully Select the 3(38) Provider. Not all 3(38) providers are created equal. Review credentials, processes, performance outcomes, and references. Confirm the scope of discretionary authority in writing.

Monitor the 3(38) Fiduciary. ERISA still requires sponsors to monitor all fiduciaries they appoint. Set regular reporting expectations (quarterly at minimum), review meeting minutes, and ensure adherence to agreed procedures.

Maintain a Written Investment Policy Statement (IPS). A robust IPS outlines objectives, roles, and expectations for the 3(38) provider. It acts as the roadmap for the relationship and a critical document if questions arise later.

Evaluate Fees and Services. Sponsors should periodically benchmark the cost and quality of the 3(38) provider relative to peers. High fees or poor responsiveness warrant follow-up.

Risks and Challenges

While 3(38) arrangements reduce one type of liability, they introduce others:

• Selecting the wrong provider can compound risk rather than reduce it.
• Overreliance on the provider can lead to lax sponsor engagement, which itself is a fiduciary failure.
• Communication gaps between the sponsor, the 3(38) provider, and participants can diminish outcomes.

Sponsorship does not end with signing a contract. Fiduciary responsibility shifts, but it doesn’t disappear.

How a Plan Advisor Can Help

A retirement plan advisor plays a central role in helping sponsors evaluate whether a 3(38) arrangement makes sense:

• Gap Analysis — Identify where sponsor risk is highest and where a 3(38) fiduciary could add value.
• Provider Selection — Screen and recommend qualified 3(38) candidates, then help negotiate terms.
• Documentation Support — Assist with IPS updates, review schedules, and reporting frameworks.
• Ongoing Governance — Provide ongoing oversight benchmarking and scorecards that help sponsors fulfill monitoring duties.

In addition, many plan advisors offer ERISA 3(38) investment management services through their Registered Investment Adviser (RIA) firms.

A Litigation Case Study: Wanek v. Russell Investments Trust Co.

This case study helps illustrate the value of hiring a 3(38) fiduciary and implementing a prudent process.

The Allegations: Plan participants brought the suit against two distinct groups:

1. The “internal” fiduciaries: the plan sponsor (which had appointed an investment committee) and the 401(k) plan; and
2. An “external” fiduciary: the plan’s ERISA 3(38) fiduciary investment manager.

The participants alleged that the internal fiduciaries breached their duty to monitor the 3(38) fiduciary. They also alleged that the 3(38) fiduciary had breached its duties of loyalty and prudence by selecting inferior funds through a conflicted process.

The Outcome: The court granted the internal fiduciaries’ motion for summary judgment, finding that the fiduciaries had exercised prudence in their initial selection of the 3(38) fiduciary and through various ongoing monitoring steps. However, the court denied the 3(38) fiduciary’s motion for summary judgment, finding there were triable issues of fact worthy of a trial.

The World Investment Advisors View of This Case

• There is definable value in hiring an ERISA 3(38) fiduciary investment manager. The court explained how the committee’s engagement of a 3(38) fiduciary left it with only the duty to show it had prudently hired and monitored the 3(38) fiduciary.
• When a plan sponsor or committee engages a 3(38) fiduciary, it can show that it satisfies its residual responsibilities through some routine steps, such as:
  • Performing a due diligence exercise before the engagement;
  • Meeting consistently;
  • Being aware of its IPS; and
  • Receiving market and investment reporting information allowing for IPS compliance.
• When there are genuine “triable” issues regarding the selection and monitoring of a plan’s funds, a plan sponsor or committee may exit litigation by demonstrating it routinely took those steps, while the litigation continues against the 3(38) fiduciary. The outcome likely would be different if the internal fiduciaries (such as the plan sponsor or a committee) had retained the responsibility to choose and monitor the plan’s investments.

Case No. 2-21-cv-00961-CDS-BNW (D. Nev. Sept. 25, 2025).

Informational Resources

World Investment Advisors: “A Plan Sponsor Guide to Working with 3(38) Fiduciary Investment Managers” (March 10, 2023);
Captrust: “The Surprising Benefits of a 3(38) Fiduciary” (April 17, 2023)

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This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

This material is intended to provide general financial education and is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.