Why Your Business Needs a 3(38) Investment Fiduciary for Your 401(k) Plan.
- May 11
- 10 min read
If you're a business owner sponsoring a 401(k) plan, you're an ERISA fiduciary, whether you know it or not.
That means you're personally responsible for selecting and monitoring plan investments, ensuring fees are reasonable, meeting annual compliance requirements, and acting in the exclusive best interest of your employees.
Get it wrong, and you're exposed to Department of Labor audits, participant lawsuits, and significant financial penalties.
Most small business owners never signed up to be investment experts. They signed up to run a business. But the moment you established a 401(k) plan, you took on serious fiduciary obligations under the Employee Retirement Income Security Act (ERISA).
The good news? You don't have to carry this burden alone.
At Cannon Capital Management, we serve as ERISA 3(38) Investment Fiduciaries for business retirement plans, which means we take the investment liability off your plate entirely.
Here's what that means, why it matters, and how it protects both you and your employees.
Understanding ERISA Fiduciary Liability
What Is ERISA?
The Employee Retirement Income Security Act (ERISA) is a federal law that sets minimum standards for retirement plans in private industry. It was enacted in 1974 to protect the interests of employee benefit plan participants and their beneficiaries.
ERISA establishes rules for plan fiduciaries—individuals or entities who exercise discretionary authority or control over plan management or plan assets.
Who Is a Fiduciary?
Under ERISA, you're a fiduciary if you:
Exercise discretion in administering or managing the plan
Have authority to make decisions about plan investments
Provide investment advice for a fee
For most small business 401(k) plans, the plan sponsor (the business owner or company) is automatically a fiduciary.
What Are Your Fiduciary Duties?
ERISA imposes three core fiduciary duties:
1. Duty of Loyalty (Exclusive Benefit Rule)
Fiduciaries must act solely in the best interest of plan participants and beneficiaries. You cannot make decisions that benefit the company at the expense of employees' retirement savings.
2. Duty of Prudence
Fiduciaries must act with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use. This means:
Conducting proper due diligence when selecting investments
Monitoring investment performance regularly
Replacing underperforming investments when warranted
Ensuring plan fees are reasonable
3. Duty to Follow Plan Documents
The plan must be operated according to its governing documents and ERISA's rules, including timely disclosures and adherence to Department of Labor guidelines.
The Cost of Getting It Wrong
Fiduciary breaches can result in:
Personal liability for losses to the plan
Excise taxes and penalties from the IRS
Civil penalties from the Department of Labor (up to $2,259 per day for certain violations)
Participant lawsuits seeking damages and attorney's fees
According to research, over 83,000 ERISA-related lawsuits have been filed in the past decade, with some settlements exceeding $50 million.
Small plans aren't exempt. In fact, smaller plans often have higher fees and less sophisticated investment oversight—making them particularly vulnerable to fiduciary breach claims.
The Problem with Most 401(k) Plans
We review 401(k) plans for business owners regularly. Here's what we typically find:
1. Outdated Investment Lineups
Many plans haven't been formally reviewed in years. The fund lineup was selected when the plan was established, often by the recordkeeper's sales team, and hasn't been updated since.
Result: Underperforming funds, redundant options, and outdated investment strategies.
2. High Fees
Small business plans often pay significantly higher fees than they should:
Retail share class mutual funds instead of institutional share classes
Excessive recordkeeping fees relative to plan size
Revenue-sharing arrangements that inflate costs
According to industry benchmarks, small plans (under $5M in assets) average 1.09% in total fees. On a $1 million plan, that's $10,900 per year—and it compounds over time.
Over 20 years, a 1% annual fee can reduce retirement savings by more than 20%.
3. Missing Compliance Documentation
ERISA requires that fiduciary decisions be made prudently and documented thoroughly. But most small plans lack:
Investment Policy Statement (IPS) documenting selection criteria and monitoring procedures
Meeting minutes showing regular investment review meetings
Fee benchmarking reports demonstrating reasonableness
Annual fiduciary training for decision-makers
Without this documentation, you can't demonstrate that you fulfilled your fiduciary duties—even if you did everything right.
4. No Formal Fiduciary Process
The March 2026 Department of Labor guidance made this crystal clear: ERISA compliance is determined by process, not just product.
It's not enough to pick "good" funds. You need a documented, repeatable process that shows:
How investments were selected
What criteria were used
What alternatives were considered
How performance is monitored
When and why changes are made
Most business owners don't have this process, and they don't have time to create one.
What Is an ERISA 3(38) Investment Fiduciary?
This is where professional fiduciary services come in.
Under ERISA, there are different types of fiduciary roles:
3(21) Investment Advisor (Co-Fiduciary)
A 3(21) advisor provides investment recommendations, but the plan sponsor retains final decision-making authority.
You're still responsible for approving:
The investment lineup
Fund changes
Investment policy decisions
The liability is shared between you and the advisor.
3(38) Investment Manager (Discretionary Fiduciary)
A 3(38) investment manager has full discretionary authority over investment selection and monitoring.
This means:
We select all plan investments
We monitor performance quarterly
We replace underperformers without needing your approval
We document all decisions with proper due diligence
The liability for investment decisions transfers from you to us.
That's not a subtle difference. It's the difference between sharing responsibility and transferring it.
How Cannon Capital Serves as Your 3(38) Fiduciary
When we serve as your ERISA 3(38) Investment Fiduciary, here's what we do:
Investment Selection and Monitoring
Initial Investment Lineup Construction:
Conduct comprehensive due diligence on all available investment options
Build a diversified menu of investments across asset classes
Select institutional share classes to minimize costs
Ensure compliance with ERISA diversification requirements
Document selection criteria and rationale
Ongoing Monitoring:
Quarterly performance review against appropriate benchmarks
Objective scoring system evaluating performance, fees, manager tenure, and risk metrics
Replacement of underperforming funds based on documented criteria
Regular rebalancing of target-date fund glide paths
Investment Policy Statement (IPS):
Create and maintain detailed IPS documenting investment philosophy
Define fund selection and removal criteria
Establish performance benchmarks and evaluation periods
Update annually or as plan circumstances change
Compliance Documentation
Meeting Minutes: Every quarter, we document:
Investments reviewed
Performance against benchmarks
Decisions made (retain, watch, replace)
Rationale for all changes
This creates an audit trail demonstrating prudent fiduciary oversight.
Annual Fiduciary Training: We provide training for plan sponsors covering:
Fiduciary duties under ERISA
Current regulatory developments
Best practices for plan governance
How to interpret quarterly reports
404(c) Safe Harbor Compliance: ERISA Section 404(c) provides protection from liability for investment losses if participants have sufficient control over their investments. We ensure your plan meets 404(c) requirements:
At least three diversified investment options with different risk/return characteristics
Participants have ability to change investments at least quarterly
Proper disclosures about investment options and fees
Access to sufficient information to make informed decisions
Fee Benchmarking: We conduct annual fee benchmarking against comparable plans to demonstrate that your plan's fees are reasonable. If fees are out of line with market norms, we work with you to negotiate reductions.
Cost Reduction
In addition to transferring liability, we typically reduce plan costs:
Investment-Level Savings:
Replace retail share class funds (expense ratios 0.75%-1.25%) with institutional share classes (0.05%-0.50%)
Eliminate revenue sharing that inflates costs
Remove redundant or unnecessary fund options
Recordkeeper Savings:
Benchmark recordkeeping fees against industry standards
Negotiate with current provider or recommend competitive alternatives
Typical recordkeeping fees: $50-75 per participant for plans with 50+ participants
Total Plan Cost Impact: Most plans we review are paying 1.00%-1.50% in all-in costs. We typically bring that down to 0.50%-0.80%—a reduction of 0.30%-0.70%.
On a $2 million plan, that's $6,000-$14,000 per year in savings going to employees' retirement accounts instead of fees.
Recent Department of Labor Guidance (March 2026)
In March 2026, the Department of Labor proposed new regulations titled "Fiduciary Duties in Selecting Designated Investment Alternatives."
The proposed rule clarifies how ERISA fiduciaries satisfy their duty of prudence when selecting and monitoring investment options in participant-directed plans like 401(k)s.
Key Takeaways from the Proposed Rule:
1. Process Over Product
The DOL reaffirmed that ERISA fiduciary compliance is determined by process, not product. Fiduciary obligations apply uniformly across all investment types—traditional mutual funds, ETFs, and even alternative investments.
2. Documentation Is Critical
The rule establishes a process-based safe harbor. A fiduciary who "objectively, thoroughly, and analytically considers relevant facts and circumstances" and appropriately documents that process is presumed to have satisfied ERISA's duty of prudence.
Translation: Good intentions aren't enough. You need documentation.
3. Six Key Factors to Consider
The DOL identified six non-exclusive factors fiduciaries should consider:
Performance: Historical returns relative to benchmarks and peer groups
Fees and expenses: Reasonableness relative to services provided
Liquidity: Ability for participants to access their money when needed
Valuation: How assets are valued and frequency of valuation
Performance benchmarks: Appropriateness of benchmarks used to evaluate performance
Complexity: Whether the investment's complexity is appropriate for the participant population
4. Applies to Target-Date Funds
The rule expressly applies to asset-allocation funds, including target-date funds. This is significant because target-date funds are the default investment option in most 401(k) plans.
Fiduciaries must understand not just the fund's name and glide path, but also its underlying holdings, liquidity management, and valuation practices.
What This Means for Plan Sponsors
The March 2026 guidance increases the documentation burden for plan fiduciaries.
Plans that cannot demonstrate a documented oversight process—with meeting minutes, investment scorecards, fee benchmarking, and decision rationale—are at significant compliance risk.
This is exactly what we provide as a 3(38) fiduciary.
Who Benefits from Cannon Capital's 3(38) Services?
For Business Owners and Plan Sponsors
Remove Personal Liability You are no longer personally responsible for investment selection decisions. That liability transfers to us as the 3(38) fiduciary.
Demonstrate Prudent Process In the event of a DOL audit or participant lawsuit, you can demonstrate that you hired a qualified professional fiduciary and delegated investment authority appropriately.
Reduce Time Burden You don't need to attend quarterly investment committee meetings, review fund performance, or stay current on investment trends. We handle all of that.
Focus on Your Business You can spend your time running your business instead of managing retirement plan investments.
For Employees
Lower Fees = More Retirement Savings Reducing plan fees from 1.20% to 0.60% on a $100,000 account saves $600 per year. Over 20 years at 7% growth, that's an extra $26,000 in retirement savings.
Better Investment Options Regular monitoring ensures underperforming funds are replaced and the investment menu stays current with best practices.
Professional Oversight Employees have confidence that their 401(k) is being professionally managed by experts, not just left on autopilot.
Fiduciary Protection When the plan sponsor acts prudently by hiring a qualified 3(38) fiduciary, it benefits everyone—reducing the risk of plan failures that could harm participants.
Common Questions About 3(38) Fiduciary Services
"Doesn't our recordkeeper provide investment oversight?"
Recordkeepers (Fidelity, Vanguard, Principal, etc.) provide plan administration and recordkeeping services, but they typically do not serve as ERISA 3(38) fiduciaries.
They may offer a menu of funds to choose from, but the responsibility for selecting and monitoring those funds falls on the plan sponsor—unless you've hired a 3(38) fiduciary.
"Our advisor already helps with investments. Isn't that enough?"
Many advisors provide 3(21) services, meaning they recommend investments but you retain final approval authority.
This is helpful, but you're still a fiduciary for investment decisions—and you're still liable if something goes wrong.
With 3(38) services, we have full discretionary authority and the liability transfers to us.
"We're a small company. Do we really need this?"
Small plans are actually at higher risk for fiduciary issues because they often:
Pay higher fees (less negotiating power)
Have less sophisticated investment oversight
Lack dedicated HR or benefits personnel
Have less documentation of fiduciary processes
A 3(38) fiduciary levels the playing field, giving your small plan the same professional oversight that large corporate plans have.
"How much does 3(38) fiduciary service cost?"
Our 3(38) fiduciary services are typically 0.20%-0.50% of plan assets, depending on plan size and complexity.
For most plans, the cost is offset by the fee savings we generate through better fund selection and recordkeeper negotiation.
"What if we want to keep certain investment options in the plan?"
As a 3(38) fiduciary, we have discretionary authority over the investment menu. However, we work collaboratively with plan sponsors and consider their preferences.
If there's a specific fund you want to retain (such as a company stock fund or a self-directed brokerage option), we can discuss whether it's appropriate for the plan and document the reasoning.
Getting Started with Cannon Capital
If you're a business owner with a 401(k) plan and you recognize any of these warning signs, we should talk:
Warning Sign #1: You haven't formally reviewed your investment lineup in the past year
Warning Sign #2: You don't have documented meeting minutes for investment decisions
Warning Sign #3: You're not sure if your plan fees are competitive
Warning Sign #4: You don't know what your fiduciary liability actually is
Warning Sign #5: You've heard about ERISA lawsuits and you're concerned about your exposure
Our Process
Step 1: Plan Review and Fee Benchmark We'll review your current plan at no cost, including:
Investment lineup analysis
Fee benchmarking against comparable plans
Identification of compliance gaps
Assessment of fiduciary risk
Step 2: Proposal and Implementation If we're a good fit, we'll provide a proposal outlining:
Our 3(38) fiduciary services
Recommended investment lineup changes
Projected cost savings
Implementation timeline
Step 3: Ongoing Management Once engaged, we:
Implement the new investment lineup
Provide quarterly monitoring and reporting
Handle all investment decisions going forward
Maintain full compliance documentation
Provide annual fiduciary training
What Makes Cannon Capital Different
Fee-Only Fiduciary We're a fee-only registered investment advisor. We don't earn commissions on products we recommend. Our only compensation comes from our advisory fees, which aligns our interests with yours.
Comprehensive Approach We don't just manage the 401(k) investments in isolation. We can integrate your 401(k) plan management with overall business financial planning, executive compensation strategy, and ownership succession planning.
Personalized Service You'll work directly with our advisors—not a call center or a fund company sales rep. We're a local firm serving business owners who want a long-term partner, not a vendor.
The Bottom Line
Running a compliant 401(k) plan isn't optional. ERISA's requirements are real, and the penalties for non-compliance are significant.
The question isn't whether you need professional fiduciary help—it's whether you want to carry that burden yourself or transfer it to a qualified 3(38) investment fiduciary.
At Cannon Capital, we take that burden off your plate entirely.
We handle the investment selection, the monitoring, the documentation, the compliance—everything required to demonstrate prudent fiduciary oversight under ERISA.
You get to focus on running your business. Your employees get better investment options and lower fees. And everyone benefits from reduced fiduciary risk.
If you're ready to stop worrying about 401(k) compliance and start focusing on what you do best, reach out. We're here to help.
Schedule a Complimentary 401(k) Plan Review
We offer complimentary plan reviews for business owners with 401(k) plans. We'll benchmark your fees, review your investment lineup, and identify any compliance gaps—at no cost and no obligation.
Important Disclosure: This article is for educational purposes only and does not constitute legal or financial advice. ERISA 3(38) fiduciary services require formal agreements and disclosures. Cannon Capital Management is a fee-only registered investment advisor and does not provide legal services. Consult with qualified ERISA attorneys and financial advisors regarding your specific 401(k) plan. The examples and statistics provided are for illustrative purposes and actual results will vary based on plan size, current providers, and specific circumstances.
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