When retirement plan administrators make an error
Providers of retirement plan administrative services have proliferated over the years as the complexity of plan administration has mushroomed. In a litigious environment, plan sponsors need to pay close attention the role of fiduciaries and the level of responsibility assumed by external administrators. EBN recently spoke to Ken Waineo, senior director, business development and retirement plan operations for The Standard to explore these topics.
Employee Benefit News: Is a plan sponsor by default the plan administrator?
Ken Waineo: The most common structure is for an employer is to be designated as the plan administrator in the plan document, or employees who are serving on a committee. But there are many external providers stepping up and saying that they can sign on as a third party plan administrator, or TPA, to support the plan administrator. Some act in a fiduciary capacity, and others do not.
EBN: What role do you typically play?
Waineo: We provide 3(16) fiduciary services, but we do not sign on as the plan administrator. The plan administrator has responsibility for selecting a TPA and recordkeeper, so if we acted as the plan administrator, we would be overseeing our own services. That wouldn’t work.
EBN: But even if the employer retained another entity to act as plan administrator, it still couldn’t escape its ultimate responsibility for overseeing service providers anyway, right?
Waineo: Yes, the employer can never completely get away from their fiduciary responsibility. They still have the obligation, at the very least, to oversee the plan administrator, and one of the plan administrator’s primary obligations is to overview the service providers and be sure that the services that are being provided are accurate and delivering value for what they’re being paid.
EBN: So where does 3(16) fiduciary status fit into the equation?
Waineo: Section 3(16) of ERISA describes a set of plan administrative services that are carried out by an entity that typically would act in a fiduciary capacity. But we’re starting to see more TPAs state that they’re doing 3(16) services, but they are not actually acknowledging it in their contracts that they’re assuming a fiduciary responsibility. They may be tracking participant eligibility, sending fulfillment notices, approving loans, hardship and other distributions, and compliance corrections at the plan administrator’s direction. But the way they operate, if anything goes wrong, the liability is with the plan administrator who hired them, because the TPA or recordkeeper has disavowed taking on the fiduciary obligation.
EBN: Does not being held accountable as a fiduciary change anything about the quality of service they provide?
Waineo: If you’re a fiduciary, you’re required to act in the best interests of the participants. One would hope a TPA would do that even if it didn’t explicitly state that it’s acting in a fiduciary capacity, but there is still an important distinction there. Fiduciaries are obligated to correct any errors they make. If an employer is looking at service providers offering 3(16) services that don’t also want to assume the role of fiduciary, employers should ask them why.
EBN: Can a recordkeeper or TPA act in the fiduciary capacity with respect to some services, and not others, or is it an all-or-nothing proposition?
Waineo: Yes. For example, our work can be structured so that we act in a 3(16) capacity and act as a fiduciary on certain plan administration functions, and not on others. It gives plan sponsors an a la carte option to decide how they want to work with us.
EBN: This sounds like it could get quite complicated. Do you think employers are always clear on what they are buying, whoever the service provider?
Waineo: This is why it’s critical to read the service contracts. You’ll see providers saying, “We’re taking on responsibility for these things but maybe not these others.” Our language says we hold harmless and indemnify the plan sponsor should there be any failure that’s caused by us in these particular services. It should be spelled out very clearly.
EBN: Which administrative services to do you perform typically while assuming fiduciary status?
Waineo: We track eligibility, send out a notice of eligibility to participants, we’ll send out almost all fulfillment notices for the plan, any sort of required communication. We will approve loans and distributions, including qualified domestic relation orders, and hardship distributions. We will take some discretion with compliance testing. Those are pretty much the sort of services that we provide on a fiduciary basis.
EBN: Is it unusual for service providers to assume fiduciary responsibility when offering these services? What’s the trend?
Waineo: For us, half of the plans that we wrote last year have 3(16) services connected to them. It’s a significantly growing portion of our business, since we first introduced 3(16) services about five years ago. We were one of the very few offering such services, where now there’s a lot more people in the marketplace. I would say there’s a growing appetite for the service.
EBN: Are there any newer 3(16) services that administrators are taking on?
Waineo: Fulfillment is one that has generally fallen on the shoulders of the plan sponsor, and now more administrators are taking that on, like sending out eligibility notices on a timely basis.
EBN: Are there any downsides for plan sponsors to having administrators assume fiduciary liability when they perform 3(16) services?
Waineo: One thing to take into account is many TPAs do have an additional charge for being a 3(16) fiduciary. So sponsors should do a cost/benefit analysis. But with us, it’s just included in the service package.
EBN: What does it actually mean on a practical level that you take responsibility? Does that include incurring legal charges to defend against litigation?
Waineo: The service agreement will absolutely spell out what happens or what’s expected to happen if there is any sort of litigation. And usually the contract will require cooperation between the parties to defend against litigation. The stronger service contracts will hold harmless and indemnify plan sponsors for any errors that we make. So it’s specifically stating that if something goes wrong and we’re responsible, we recognize that we are liable for that. There are also contracts used by some TPAs that set pretty significant limits of liability, which is something to watch out for.
EBN: As a practical matter, if a TPA makes an incorrect decision as it relates to a single participant — let’s say, improper denial of a hardship withdrawal request — is the liability associated with that really very significant?
Waineo: Generally no, it’s the systemic errors that are really the focus of where the liability lies. If, for example, the administrator is making many decisions based on an inaccurate reading of the plan document, resulting in under-paying or over-paying many participants, that would create a large liability.
EBN: Can you envision a scenario in which an error is so serious that it results in plan termination? How could an external administrator take responsibility for that?
Waineo: With the nature of 3(16) services, I don’t think any errors there are going to result in the disqualification of a plan.
EBN: To what extent has the market for 3(16) service providers become standardized and commoditized?
Waineo: I think 3(16) providers are very, very different from each other right now. They’re different in how they price, what services they actually will provide, and will clearly state their fiduciary status in performing those services — if something goes wrong, who is on the hook and what does that really look like? What’s the limit to their liability?
EBN: Are consultants that help plan sponsors pick asset managers also doing a good job in helping sponsors select plan administrators?
Waineo: The consultant groups are coming up to speed very quickly and starting to gain a good amount of knowledge on these 3(16) services. They can be a great help to employers as they navigate the process of picking an administrator.
EBN: Do you anticipate a growing role for external plan administrators?
Waineo: I do. Companies don’t think of administering their own retirement plan as a top strategic priority. I think service providers are going to do more and more as employers see the benefit of offloading these tasks. And I also think service providers are going to assume more and more responsibility for the quality of their work.