- Douglas Cranage and Wesley T. Stohler, CPC, QPA
Outsourcing 3(16) Fiduciary Services
Under ERISA, the Plan Administrator has the ultimate fiduciary responsibility for the overall operation of the plan, including the investment of plan assets and various administrative functions. Unless another individual or party is designated in the plan documents, the employer is by default the Plan Administrator. The employer can delegate various investment and administrative responsibilities to others but most professionals agree that it is impossible for an employer to delegate responsibilities in a manner that eliminates all fiduciary responsibility and associated liability.
Throughout the past decade, there has been an increasing dialogue on the part of the DOL, investment product vendors, investment brokers and advisors about what it means to be a fiduciary with respect to a 401(k) or other retirement program subject to ERISA. Much of the focus has been on how plan sponsors can manage and minimize the liability associated with being fiduciaries of their company retirement plans. As an outgrowth of that dialogue, some service providers are now marketing optional products and services designed to minimize fiduciary risks to plan sponsors. To date, most of these products and services relate to the fiduciary investment functions associated with managing ERISA plans. A relatively new phenomenon, which is the subject of this article, is the transfer of fiduciary liability for plan-related administrative functions from the employer to an outside party.
3(16) Fiduciary
Simply stated, a 3(16) fiduciary is the Plan Administrator who has responsibility for the day-to-day operations of a retirement or other benefit plan, as defined in Section 3(16) of ERISA. If a specific individual or entity is not designated as Plan Administrator in the plan’s written document, the employer assumes that responsibility by default. The term "plan administrator" is often confused with the terms "administrator" and "contract administrator" which historically have been used to identify outside entities hired by the Plan Administrator to perform ministerial functions. As a TPA firm, ABP supports clients as a contract administrator which historically has been a non-fiduciary capacity.
Until recently, it has been unusual for anyone other than the employer who sponsors a plan to take on the fiduciary responsibility (and related liability) associated with being the designated Plan Administrator.
What Specific Duties Are Part of The Plan Administrator’s Responsibilities?
By definition, the Plan Administrator is a "named fiduciary" under ERISA. A partial list of specific Plan Administrator responsibilities that are typically identified in the plan document is as follows:
Determine eligibility of employees to participate in the plan
Retain TPA, Attorney, Actuary, CPA and other experts to assist with the operation of the plan
Maintain all necessary records
Interpret the plan document and publish plan rules
Review and approve participant benefit claims
File Form 5500 annual return and related schedules
Obtain a fidelity bond to protect plan assets
Provide plan documents to participants on request
Distribute benefit statements, SPDs (Summary Plan Descriptions) and SMMs (Summaries of Material Modification) to participants
Distribute enrollment materials, fee disclosures and required notices to participants
Review and approve plan financial statements and investment reports
Fix plan operational problems
As a practical matter, many of the above functions are delegated to internal staff and outside service providers, but the Plan Administrator (typically the employer) retains ultimate responsibility for monitoring the work.
Outsourcing 3(16) Fiduciary Responsibilities
Most employers rely on TPAs, CPAs, Attorneys, financial institutions, recordkeepers, and other professionals for technical and administrative support in carrying out their fiduciary responsibilities under ERISA. As noted above, service providers who have historically been hired to provide plan-related advisory and administrative services have operated in a non-fiduciary capacity, with the employer retaining ultimate decision-making responsibility and related fiduciary liability for the operation of the plan.The recent emergence of firms who are willing to accept fiduciary responsibility for some or all of the functions associated with operating an employer-sponsored retirement plan can be intriguing, particularly to employers who are overwhelmed by the complexities of their responsibilities as Plan Administrator. The types of firms offering these services include TPAs who perform the work themselves or other firms who don't actually do the work but monitor plan operations and assume legal responsibility for work performed by others.
Pros and Cons
Potential benefits associated with delegating 3(16) fiduciary responsibilities to an outside firm include:
Internal time savings: There may be an opportunity to reduce the amount of management time that needs to be devoted to overseeing plan operations.
Another set of professional eyes on the plan: Contracting to have a truly independent 3(16) fiduciary adds another layer of review that minimizes the potential for error and/or provides for earlier detection and correction of problems. (This would be the case only if the 3(16) fiduciary is not the same entity that is actually performing the work.)
Reduced fiduciary liability for the employer/Plan Administrator: If a fully competent 3(16) fiduciary is selected, the employer’s fiduciary liability will be reduced. The extent of the reduction in liability will be highly dependent on the specific terms and conditions of the agreement between the employer/plan and the designated 3(16) fiduciary.
Potential concerns about retaining the services of a 3(16) fiduciary include:
Practicality of actually being able to fully delegate all Plan Administrator responsibilities to an outsider: Typically, a service provider who presents itself as a 3(16) fiduciary assumes responsibility for only some functions, such as calculating plan eligibility or approving benefit distributions. There are a few service providers who are willing to assume full fiduciary responsibility as the designated Plan Administrator, but that tends to be the exception. Further, if the employer is able to delegate full Plan Administrator fiduciary responsibility to an outside firm, the employer continues to retain a fiduciary responsibility under ERISA to continuously monitor the services of the firm to which responsibilities have been delegated.
Outsourcing 3(16) fiduciary services tends to be expensive: Fees can range from 5/100ths of one percent to half of one percent of plan assets, depending on the size of the plan. Some 3(16) service providers impose minimum dollar fees that can be cost-prohibitive to smaller plans, particularly those with assets below 3 to 5 million dollars. Fees associated with taking on 3(16) responsibilities are in addition to those charged to actually do the work.
Contractual language may limit services and fiduciary responsibility: In retaining an outside 3(16) fiduciary, the employer must be particularly careful to read the small print. Some providers approach the offering of 3(16) fiduciary services primarily from a marketing perspective. While they say they are assuming fiduciary responsibility from the employer, the small print in their contracts can have material exclusions or require certifications from the employer that actually push much of the fiduciary liability exposure back on its shoulders.
Loss of employer control: Employers who delegate 3(16) fiduciary responsibility to outside service providers also lose operational control with respect to the function or functions so delegated. For example, an employer who outsources full Plan Administrator responsibility may forfeit the right to interpret plan document provisions or determine plan rules. Whether this is significant or inconsequential will likely depend upon the specific issue and mindset of the business owners and executives.
Additional Points to Ponder
The DOL proudly points to the number of plan officials that it has fined or imprisoned and the amount of revenue it collects each year in pursuing violations. A substantial portion of the cases cited by the DOL involve alleged investment breaches rather than administrative violations and a high percentage of the statistics likely represent very large plans. Also, many of the cases involve egregious violations. Nonetheless, as Brian Graff from ASPPA points out, "the DOL is the new sheriff in town." Many ERISA attorneys make the point that it is impossible for an employer to operate a totally error-free retirement plan for an extended period of time. Nonetheless, some argue that the outsourcing of 3(16) fiduciary services is a solution looking for a problem that does not really exist in a material way. Under ERISA, employers who sponsor tax-qualified retirement plans do assume fiduciary responsibility to operate those plans solely in the best interest of plan participants and beneficiaries. However, employers who take reasonable steps internally to follow the rules and who are diligent in selecting and monitoring service providers substantially minimize the possibility that there will be errors and omissions that rise to the level where plan fiduciaries or the business itself are at material risk.
Most errors involving operational failures can be fixed without breaking the bank if detected early and addressed in a timely manner (see companion article discussing late contributions). In recent years, both the IRS and DOL have developed programs that allow plan sponsors to voluntarily correct errors and omissions, either without penalty or subject to the payment of sanctions that are relatively modest.
ABP is proud of the fact that we have elected to undergo the rigorous process required to obtain and maintain a CEFEX Certification for Retirement Plan Service Providers through ASPPA and the Centre of Fiduciary Excellence. While this certification does not transfer fiduciary responsibility from plan sponsor clients to ABP, it does provide independent recognition that we adhere to industry "best practices" with respect to the way we operate internally and service clients' plans. At last check, we were one of only 47 retirement plan TPAs nationwide who have obtained this independent certification.
Employers have the opportunity to purchase fiduciary liability insurance to provide financial protection to plan fiduciaries resulting from unintended errors or omissions in carrying out both their administrative and investment responsibilities. Annual premiums for a million dollar fiduciary liability policy can be as low as $1,000. The purchase of this insurance provides added protection and may be a source of comfort to plan sponsors and individual fiduciaries. For those plan sponsors who are risk averse, the purchase of fiduciary liability insurance can serve as either a supplement or alternative to hiring an outside 3(16) fiduciary.
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