Understanding roles and responsibilities under ERISA 3(16)
Plan sponsors are hearing a growing trend of investment advisers and other services providers selling ERISA 3(16) plan administrator services. Sometimes referred to as administrative fiduciary services, the primary pitch is that the service provider can take on more of the administrative functions that would otherwise fall on the plan sponsor and provide additional fiduciary protections in the process. Although using fiduciary liabilitys as a scare tactic is not a new sales pitch for those that have been around the industry for a long time, the additional services offered by the 3(16) plan administrator can sound enticing.
This article provides a high-level discussion of 3(16) services from the perspective of whether it adds value from the plan sponsor perspective. Future articles in this series will explore some of the specific services being offered and will provide suggestions on how sponsors can evaluate those servies.
What is 3(16) and the plan administrator role?
3(16) referes to the section of the Employee Retirement Income Security Act of 1974 that establishes the role of the plan administrator. ERISA section 3(16) along with a parallel provision in the tax code indicates that unless another party is named, the plan sponsor acts as the plan administrator. This is a fiduciary role that has a number of responsibilities realted to the plan’s day-to-day operations including filing form 5500, authorizing participant transactions such as loans and distributions, hiring the plan auditor, furnishing required participant notices, and more.
Another critical role of the plan administrator is the duty to interpret ambiguous plan provisions. This function arose from a Supreme Court opinion in the late 1980s. It held that if a plan document includes specific language giving the plan administrator the authority to interpret plan provisions, courts would generally defer to those interpretations in litigation unless the interpretation was “arbitrary, capricious or an abuse of power.” That might sound like a lot of legal mumbo jumbo, but that deference can be the difference between a would-be lawsuit getting dismissed early and having it go the distance to wrack up huge fees.
What is the general fiduciary standard?
Although often thought-of in the context of plan investments, the fiduciary standard applies to any party that has authority to make plan decisions. That includes the ERISA 3(16) plan administrator. So, what does that standard entail? Although we could spend many pages exploring this in detail, the overarching principals are that fiduciaries must act in the best interest of plan participants (and other beneficiaries) and must exercise their duties with the skill, diligence and prudence of an expert.
The outsourcing trend
That fiduciary standard sounds like a tall order, and that is what is often used to sell the idea of hiring an outsourced 3(16) administrative fiduciary. It is true that a fiduciary must act as a prudent expert, and that sometimes means hiring outside providers that can fill gaps in that expertise. But this is where a healthy dose of skepticism can work in your favor. What services is the proposed outsource 3(16) really brining to the table? For example, if they are doing the same work with respect to participant distribution requests that they do for their non-3(16) clients with the exception of signing on the dotted line, are they really lending expertise that justifies an additional fee. Is it really in the best interest of plan participants to use plan assets to pay an additional fee to someone to simply sign-off on distribution requests? Not to mention, participant transaction support is generally priced on a per-transaction basis, yet 3(16) services are typically priced using an asset-based fee.
There are certainly situations when hiring an outsourced administrative fiduciary might add tangible value. Consider a company with multiple divisions or locations but no centralized HR, benefits or payroll department. In that setting, giving an outsourced service provider the authority to conduct the day-to-day affairs of the plan and coordinate all of those separate divisions might make a lot of sense.
In smaller organizations with fewer moving parts, the time savings business owners are often seeking can be accomplished by hiring good quality recordkeepers and third party administrators. As non-fiduciary service providers, the price tag is often much lower, yet they still bring the expertise that a plan sponsor needs.
To cut to the chase, the real questions to ask are:
· How much time are you realing saving by working with an outsourced 3(16) plan adminstrator?
· Is that providing a benefit to you or to the participants?
· What, if any, fiduciary protection is the arrangement really affording you?
· Could you save the amount of time by working with non-fiduciary service providers that are often priced more cost-effectively?
· If so, wouldn’t that be the more prudent course of action whenti comes to your participants’ retirement accounts.