What are the Types of Fiduciary Financial Advisors and How can they Impact your 401(k)

What is a 401(k)?

Let’s talk about the fundamentals of a 401(k). Your 401(k) is an important tool you can tap into for financial independence, investing in your future, and most notably, planning for retirement.

Simply put, a 401(k) is a retirement savings plan sponsored by your employer, in which employees can routinely contribute a portion of their paycheck to this investment account, before or after tax. Employers may also contribute, commonly by matching a percentage of your contributions. Your investments within your 401(k) can grow through compounded interest and market gains, helping you prepare for retirement throughout your career. 

While having a 401(k) is common at many companies, there are important details to understand that can impact your savings. What may seem like a straightforward process can include unexpected fees that add complexity and have a lasting effect on your account. Taking time to understand these fees can help you stay on track with your long-term financial goals.

The Common Fees Associated with a 401(k)

Managing a 401(k) requires the use of many systems and input from professionals, which are the main drivers for these additional fees. For example, the provider of your 401(k) plan charges for the cost of maintaining accounts, processing investments, and accessing financial tools. A few common fee types you may encounter include investment, administrative, individual service, and custodial fees.

There are actions you can take to help understand these fees, like reviewing your 401(k) statement on a regular basis. Becoming familiar with categories such as “Total Operating Expenses” or “Expense Ratios” in your statement are the areas you’ll want to focus on to choose lower cost funds. Prioritizing funds with lower expense ratios can help you keep your costs low as well. For example, Exchange-traded funds (ETFs) or index funds tend to have lower fees compared to mutual funds that are actively managed. It’s important to note that 401(k) fees continue when you retire. To keep fees low during retirement, you may want to consider options available to roll over your 401(k) funds into an IRA. Another measure you can take to reduce your 401(k) fees is to negotiate with your employer. Fees over 2% are unusually high, and it may be worth a conversation with your HR department to change the offering or potentially work with a different provider. 

According to Savvy Advisor, Dave Sharpe, C(k)P® charterholder of the Certified 401(k) Professional Designation administered by The Retirement Advisor University in collaboration with UCLA Anderson School of Management Executive Education, "one of the most overlooked strategies for reducing 401(k) costs is fund selection. Exchange-traded funds and index funds typically carry lower expense ratios than actively managed mutual funds. Additionally, remember that 401(k) fees don't stop at retirement—rolling your balance into an IRA can be an effective way to maintain fee control throughout your retirement years."

Financial Advisors and 401(k)’s‍‍

Now that we’ve gone over the basics of a 401(k) and the importance of understanding the associated fees, let’s talk about financial advisors and the three types of fiduciary financial advisors that could be supporting your 401(k):

1. 3(16) Fiduciary
2. 3(21) Fiduciary
3. 3(38) Fiduciary

You may have heard these numbers before in financial consultations or conversations depending on if you have deep dived into your 401(k) plan or met with a financial advisor before. However, you might not have realized that each of those numbers corresponds to a different fiduciary financial advisor that can impact your financial future.

We’re here to help you understand the different types of fiduciary financial advisors, so you can determine which one best aligns with your needs.
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First, what is a fiduciary financial advisor?

A fiduciary financial advisor manages assets on behalf of clients with a legal obligation to act in their best interests, acting as a plan administrator for your 401(k).

They must:

1. Uphold the clients' interests over their own
2. Act in good faith and provide all material facts
3. Mitigate and disclose conflicts of interest
4. Provide fair and balanced advice
5. Refrain from using client data and/or assets for personal gain

Do you have a financial advisor on your 401(k) plan?

If you’re unsure whether your current plan includes a fiduciary advisor, now’s the time to check! Support plans can range, each type affecting your 401(k) differently.

It’s important to choose a financial advisor that fits your specific needs, whether it be, tax planning, preparing for retirement, a major life change, or another financial priority.

For example, if you recently left a company, your 401(k) with that firm may be subject to additional fees when transferring over. Finding an advisor that supports this activity can help you avoid any major charges and potentially even roll over your 401(k) to a new platform on your behalf. 

What’s the Difference between the Types of Fiduciary Advisors?

At a high level, these are the key differences between the three fiduciary advisors:

• 3(16) focuses on plan administration
• 3(21) and 3(38) specialize in investment management
• 3(21) provides advice, while 3(38) makes investment decisions

Here is a bit more of a detailed breakdown of the responsibilities of a fiduciary advisor by different types.

3(16) Fiduciary

A 3(16) fiduciary advisor’s responsibility is centered around management and administration of a retirement plan. Day to day, they handle items from distributing summary plan descriptions, managing member enrollment, and ensuring that reporting requirements are met and follow compliance guidelines. Chances are, your HR or people team at your company work directly with a 3(16) on behalf of the entire organization. You may never speak with this advisor on the plan.  

3(21) Fiduciary

A 3(21) fiduciary advisor offers investment advice but does not manage any investments. These advisors can provide insight and recommendations on how to invest retirement plan assets. However, it’s important to note that a 3(21) advisor will charge a fee for these services and that their liability aligns with the plan sponsor. That said, their involvement level can range, from offering limited investment suggestions to taking a more active advisory role. You can ask your HR or people team to share which type of advisor is on your plan. 

3(38) Fiduciary

A 3(38) fiduciary engages fully in selecting, monitoring, and reviewing the funds contributing to a 401(k). Since this role requires a greater degree of responsibility, not all financial professionals are certified to act as a 3(38) fiduciary. This role is reserved for banks, insurance companies, and registered investment advisors (RIAs) who specialize in handling 401(k) plans. Another major difference is that a 3(38) fiduciary can make investment related decisions on behalf of the plan, providing greater authority, control and oversight.

Dave Sharpe,C(k)P®, notes that "understanding the distinction between 3(16), 3(21), and 3(38) fiduciaries is crucial for plan sponsors and participants alike. A 3(16) handles administrative compliance, a 3(21) provides investment advice while you retain decision-making authority, and a 3(38) takes full discretionary control over investment selections. None is inherently superior—what matters is alignment with your organization's needs and risk tolerance."

Latest Statistics Around Fiduciaries

With a better understanding of the different fiduciary responsibilities, we also wanted to provide a breakdown of the latest trends around retirement planning.

A recent study found that 65% of advisors report their clients spend up to 25% of their time on retirement plan administrative tasks that could be outsourced. Additionally, 25% of advisors indicate that clients spend between 25% and 50% of their time on these administrative duties, highlighting the growing need for efficient outsourcing solutions. (National Association of Plan Advisors, 2023).

Overall, there’s a major area of opportunity in outsourcing some of these fiduciary duties.

Choosing the Right Fiduciary Financial Advisor

Selecting the right fiduciary financial advisor depends on your specific needs and circumstances pertaining to investments and retirement planning, and working with a financial advisor can bring unparalleled insight when it comes to managing your plan. Choosing a 3(16) fiduciary for assistance in plan administration and compliance is likely the right fit given your circumstances. If you are seeking investment advice but would like to maintain ownership of financial decisions, going with a 3(21) fiduciary could be a great choice. Otherwise, handing off all investment management related decisions, opting for a 3(38) fiduciary would be a reasonable consideration. 

Consider factors such as your experience level in financial management, time available for plan administration, comfortability with investment decisions, and willingness to share or transfer fiduciary liability when weighing the pros and cons of which fiduciary to choose.

Remember, the goal is to find an advisor who aligns with your needs and helps you achieve your financial objectives. Consult with professionals and thoroughly research your options before making a decision.