As retirement plans grow, many employers begin looking for ways to reduce administrative complexity and strengthen fiduciary oversight. One of the most common approaches is outsourcing certain investment responsibilities to a 3(38) fiduciary.

The challenge is that fiduciary designations are often misunderstood. Many employers hear terms like "3(21)" and "3(38)" and assume they provide the same level of support. In reality, these arrangements involve very different responsibilities and levels of authority.

At Basic Capital, we believe plan sponsors should clearly understand what they are delegating, what responsibilities remain with the employer, and how co-fiduciary relationships work in practice.

This guide explains how 3(38) fiduciary outsourcing works, how it differs from a 3(21) arrangement, and what employers should consider when evaluating fiduciary support models.

Why Employers Consider Fiduciary Outsourcing

Managing a retirement plan involves more than selecting investments once and moving on.

Plan sponsors are expected to:

• Monitor investment performance

• Review fees

• Evaluate service providers

• Document decisions

• Maintain prudent oversight processes

For many growing organizations, keeping up with these responsibilities becomes increasingly difficult as the business expands.

A fiduciary outsourcing arrangement can help employers:

• Reduce administrative burden

• Improve governance processes

• Strengthen investment oversight

• Clarify responsibilities

• Support compliance efforts

The goal is not to eliminate fiduciary responsibility entirely. Rather, it is to delegate certain functions to qualified professionals while maintaining appropriate oversight.

What Is a 3(38) Fiduciary?

A 3(38) fiduciary is an investment manager authorized under ERISA to make investment decisions on behalf of a retirement plan.

Unlike an advisor who only provides recommendations, a 3(38) fiduciary has discretionary authority over the plan's investment lineup.

This typically includes:

• Selecting investments

• Monitoring investments

• Replacing underperforming funds

• Managing the investment menu

• Documenting investment decisions

Because the 3(38) fiduciary assumes responsibility for investment decisions, employers no longer need to approve every fund change individually.

This distinction is one of the primary reasons many plan sponsors explore 3(38) arrangements.

What Is a 3(21) Fiduciary?

A 3(21) fiduciary provides investment advice and recommendations but does not make final investment decisions.

Under a 3(21) arrangement:

• The advisor recommends investments

• The advisor provides guidance

• The employer reviews recommendations

• The employer makes final decisions

The fiduciary responsibility is shared because the employer retains decision-making authority.

Many employers choose a 3(21) arrangement when they want professional investment guidance but prefer to remain actively involved in investment oversight.

3(38) vs. 3(21): What's the Difference?

This is one of the most common areas of confusion for plan sponsors.

The simplest way to think about the distinction is:

3(21): Advice

The advisor says:

"Here are the investments we recommend."

The employer decides whether to accept those recommendations.

3(38): Discretion

The investment manager says:

"We are making this investment decision on behalf of the plan."

The investment manager has authority to implement changes without requiring employer approval for every action.

Side-by-Side Comparison

Understanding this distinction helps employers determine which arrangement best aligns with their desired level of involvement.

What Responsibilities Still Remain With the Employer?

One of the biggest misconceptions about 3(38) outsourcing is that it completely removes fiduciary responsibility from the employer.

It does not.

Even when investment management is delegated, employers still retain important responsibilities.

Plan sponsors must continue to:

• Prudently select the 3(38) provider

• Monitor the provider's performance

• Review service quality

• Evaluate fees

• Maintain governance processes

• Oversee overall plan operations

In other words, employers outsource investment management—not retirement plan oversight as a whole.

At Basic Capital, we often remind plan sponsors that delegation reduces certain responsibilities but does not eliminate fiduciary accountability altogether.

Why Employers Choose 3(38) Arrangements

Different organizations choose fiduciary outsourcing for different reasons.

Common motivations include:

Limited Internal Resources

Many HR teams and business owners lack dedicated expertise in retirement investing.

A 3(38) arrangement allows qualified professionals to manage investment oversight.

Reduced Administrative Burden

Employers may spend less time:

• Reviewing funds

• Conducting investment research

• Evaluating replacement options

• Managing investment committee decisions

More Consistent Investment Monitoring

Because investment oversight is ongoing, many employers appreciate having a dedicated fiduciary continuously monitoring the investment lineup.

Improved Governance Processes

A documented investment management structure can help support stronger fiduciary oversight and compliance efforts.

Questions Employers Should Ask Before Hiring a 3(38) Fiduciary

Before entering into a fiduciary outsourcing arrangement, employers should understand:

• What responsibilities are being delegated?

• What responsibilities remain with the employer?

• How are investment decisions documented?

• How often are investments reviewed?

• How are fees structured?

• What reporting is provided?

• How is fiduciary status documented?

The answers help clarify expectations and reduce confusion later.

When a 3(21) Arrangement May Still Make Sense

While 3(38) arrangements offer advantages, they are not automatically the right choice for every employer.

Some organizations prefer:

• Greater involvement in investment decisions

• Internal investment committees

• Shared decision-making authority

• More direct control over fund selection

In those situations, a 3(21) arrangement may provide an appropriate balance between guidance and oversight.

The right model often depends on:

• Internal expertise

• Governance preferences

• Administrative capacity

• Fiduciary objectives

Why Modern Retirement Platforms Matter

Fiduciary support is most effective when paired with technology that improves transparency and oversight.

Modern retirement platforms can help employers:

• Track plan performance

• Monitor provider relationships

• Simplify compliance processes

• Improve participant engagement

• Strengthen governance documentation

At Basic Capital, we believe retirement plans should help employers navigate fiduciary responsibilities with greater confidence and less administrative complexity.

Companies evaluating fiduciary support structures can also explore our For Employers resources to learn how modern retirement infrastructure supports governance, compliance, and retirement plan administration.

Building the Right Fiduciary Partnership

Outsourcing 3(38) responsibilities can be an effective way to strengthen investment oversight and reduce administrative burden, but it is important for employers to understand exactly what is being delegated and what responsibilities remain.

Whether a company chooses a 3(21) or 3(38) arrangement, the goal should be the same: creating a retirement plan governance structure that supports participants, strengthens compliance, and aligns with the organization's resources and expertise.

At Basic Capital, we believe successful retirement plans are built on clear responsibilities, strong oversight, and transparent fiduciary partnerships.

Ready to see how a modern retirement platform supports fiduciary governance and retirement plan administration? Get started with Basic Capital to learn how we help employers simplify plan management and support stronger retirement outcomes.