Updated September 2026 with current litigation data and new research on how plan sponsors are using fiduciary advisors.
You’re probably aware that you are subject to potential liability if you offer a 401(k) plan. That’s because you are usually considered to be a fiduciary of that plan if you’re a business owner, board member or manager of the retirement plan. In plain English, that means you are expected to put your employees’ interests first at all times. While that sounds commonsense, sometimes the devil is in the details. Managing the plan correctly to minimize liability can be very technical and time-consuming.
Still, it is critical, and the potential downside is more significant than ever. More than 600 lawsuits alleging excessive fees and imprudent investments have been filed against defined contribution plans over the past decade, and 2025 saw 94 excessive fee class actions, the most since 2020. ERISA litigation overall has picked up even more in 2026. Plaintiffs are also targeting investment performance, with 20 early 2026 cases challenging target-date funds. According to an article in PlanSponsor.com, one fiduciary liability insurance underwriter previously said claims are so commonplace that fiduciary liability insurance could disappear.
It’s especially serious since, along with your organization being potentially liable, it can extend to you. Fiduciaries of the plan can be held personally liable as well.
Quick answer: A 3(21) fiduciary advises you on investments and shares liability, but you make the final decisions. A 3(38) fiduciary takes discretionary control of the investment lineup and takes on more of the liability. Plan sponsors with limited time or ERISA expertise often choose a 3(38) for greater protection.
How Can Plan Sponsors Reduce Their Fiduciary Liability?
So clearly, liability prevention and minimization are critical. Working with an experienced retirement plan advisor is one step that can help you lessen your exposure. But you need to choose carefully, as not all advisors offer you equal levels of protection.
The key is choosing a retirement plan advisor who acts as a plan fiduciary. That way they can share your liability. However, not all advisors are held to the same legal standards.
3(21) and 3(38) Retirement Plan Advisors: What’s the Difference?
These numbers refer to sections of the ERISA, the federal law that governs retirement plans, and relate to individuals or firms that provide investment expertise to retirement plan sponsors. Beyond the numbers, you’ll find these two types of advisors are starkly different in the protection they provide to your organization.
What is a 3(21) Fiduciary?
The 3(21) Fiduciary acts as your Co-Fiduciary. They are an investment advisor who shares liability with you (as a business owner, board member or named fiduciary of the plan). This advisor will help you develop your initial fund lineup, review investment selections and make recommendations. But they don’t make the decisions; you do. So as the final decision maker, you still retain primary responsibility for fees and performance issues related to the selected funds.
What is a 3(38) Fiduciary?
On the other hand, you can directly delegate discretionary authority to a 3(38) Fiduciary. This type of advisor acts as a hands-on Investment Manager. That means they can decide what to include in your fund lineup. They can also implement it and continue to manage the funds over time.
This frees up your time and allows you to transfer much of the liability to their shoulders. You are still responsible for the due diligence to hire the right advisor, of course, and maintain liability on that end. But it is far less since they have taken that piece of exposure on directly.
Should You Choose a 3(21) or 3(38) Fiduciary?
In this risk-filled environment, you need to decide carefully. More plan sponsors are choosing to hand off investment decisions. Fidelity’s 2026 Plan Sponsor Attitudes Study found that 41% of sponsors now prefer their advisor to have full discretion over the investment menu, up from 36% a year earlier.
Here are a few points to help you determine the best fit for you and your organization.
- How much time do you have to commit to retirement plan administration?
If you and your staff are time-constrained, it is wise to consider the more full-service option, the 3(38) advisor. That way, you won’t risk something getting overlooked by your busy team.
- How much expertise do you or someone at your firm have on retirement plan administration?
If you or a team member have experience and knowledge about ERISA regulations and retirement plan administration, then a 3(21) advisor acting as a consultant may work for you. Otherwise, the 3(38) option will provide you with the expertise and knowledge you need to help prevent problems.
- How much liability protection do you want?
If you want a higher level of liability protection, the 3(38) option is the best choice. By delegating those responsibilities to the outside professional, they assume most of the potential exposure.
Of course, it all comes with a giant caveat: you need to choose the right retirement plan advisor. Be careful…many firms hire local wealth managers who only dabble in retirement plans. In this litigious environment, that can be an expensive mistake. You need a firm immersed in this specialty so they know the regulations and what constitutes best practices. Look for a specialist firm with decades of experience helping firms navigate this tricky landscape.
Download our Free EBook for More Tips
For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:
- Learn about your role as a retirement plan fiduciary
- Action steps you can take to identify any areas where you need to do more
- How to identify and implement best practices
As potential risks rise, make sure your organization is prepared. Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.
