How 3(38) Fiduciaries Limit, but Don’t Erase, Plan Sponsor Liability

When a federal district court in Nevada last month cleared Caesars Holdings Inc. of liability under the Employee Retirement Income Security Act, it kept the casino company’s 3(38) investment manager, Russell Investments, on the hook. The decision underscored a key truth about fiduciary delegation under ERISA: Hiring a 3(38) fiduciary can shift risk, but it does not erase it.

Under ERISA, employers sponsoring retirement plans bear the duties of prudence and loyalty toward plan participants, which can leave them vulnerable to litigation. By hiring a 3(38) investment manager—a fiduciary that assumes discretion over investment selection and monitoring—plan sponsors can meaningfully reduce their exposure to claims tied to investment performance or prudence. But as the Caesars’ case illustrates, the plan sponsor remains responsible for prudently selecting and monitoring that 3(38).

More Manageable Responsibility

“Delegating investment discretion to a 3(38) fiduciary meaningfully reduces a plan sponsor’s exposure,” says Brian McCarthy, fiduciary sales director at Morningstar Investment Management. “The 3(38) assumes full fiduciary liability for those decisions, which shields the sponsor from most investment-related claims. What remains is a far narrower and more manageable responsibility: prudently selecting and periodically reviewing the 3(38).”

That distinction made all the difference for Caesars. In the case, Wanek v. Russell Investments Trust Co., the court found that the casino company’s retirement committees acted prudently by conducting a full request for proposals process, hiring an experienced investment manager and holding regular review meetings. Those actions satisfied the company’s duty to monitor, even though the funds Russell chose later underperformed.

As Matthew Eickman, managing partner in the Fiduciary Law Center, put it: “When they hire a 3(38) fiduciary, they actually shift a number of those responsibilities over to another party, and they’re left merely with that responsibility to monitor. It is categorically easier to monitor somebody else’s process than to have to undertake the entire process.”

‘Defensive’ Era for Plan Governance

According to many in the retirement industry, the main defined contribution plan challenge, for so long, was about increasing participation. As employers have received more legal leeway to default employees into their retirement plans, participation has increased, but so too has the responsibility to adeptly design and monitor the plan.

“When I started in this industry over a quarter century ago, everyone worried about participation,” says Mark Jones, a partner in Pillsbury Law. “Now, committees are taking a much more defensive posture. Litigation risk has become a guiding factor in plan design in a way it never was before.”

The 3(38) model is one of the only ways, under ERISA, to formalize that defensiveness. Under a 3(38) fiduciary, the investment manager assumes full discretion—and full liability—for those decisions. In contrast, a 3(21) fiduciary lets an adviser recommend funds, but the sponsor retains responsibility for accepting or rejecting them.

“If you retain a fiduciary that expressly assumes investment manager status under 3(38), then it is an effective shift of a significant portion of your fiduciary responsibility,” Jones says. “Other arrangements like 3(21) just spread the liability around without taking it off anyone’s shoulders.”

Cost vs. Control

According to the 2025 PLANSPONSOR Outsourced Investment Manager Survey, 47.66% of sponsors of defined contribution plans—including 401(k), 403(b), 457 and nonqualified deferred compensation plans—reported that they employ a 3(38) investment manager. Additionally, more than one-third of respondents indicated that they have considered hiring one.

Eickman says the barriers to hiring a fiduciary investment manager are as much psychological as financial.

“One common reason plan sponsors don’t opt for a 3(38) is pride—a belief that committee members have the financial acumen to manage it themselves,” he says. “Then there’s trust—a concern about giving too much discretion to somebody else. Ultimately, it’s about control, and that unsettles some plan sponsors.”

Cost is another factor. Jones estimates that it is often about 25% more expensive for a DC plan to have a 3(38) fiduciary than a 3(21), and that cost will likely increase. Still, both Eickman and McCarthy argue that for large plans, which are statistically more likely to face litigation, the incremental cost of hiring 3(38) pales in comparison to the risk reduction.

“Many advisers across the country now charge the same to serve in either capacity,” Eickman says. “If it’s a few thousand dollars more and it shifts fiduciary liability off the company, that may not seem like much of an expense.”

The Era of Alternatives

Consideration of the 3(38) fiduciary option is growing following President Donald Trump’s August executive order encouraging greater investment diversification in retirement plans, including the use of alternative assets. With sponsors exploring exposure to private equity and credit, real estate, infrastructure and even digital assets, the complexity and the risk involved in designing plan investment menus are rising sharply.

“Because of the increase in automatic enrollment, we’re going to see more target-date funds serving as qualified defaults and a wider variety of fund types, including alternative assets,” Jones says. “That makes decisions more complex and creates a desire for experts who deal with these choices every day.”

Experts say that even if the Department of Labor meets its February 2026 deadline to offer significant regulatory relief to enable private assets in DC plans, using a 3(38) fiduciary reduces the extent to which the plan sponsor will have to monitor the complex investments.

“If a client came to us wanting a fund with a little cryptocurrency exposure, we’d tell them: ‘Get a 3(38) fiduciary if you can find one willing to take that on,’” Eickman says. “Because that’s the kind of thing that attracts litigation right now.”