By: Scott M. Cloud, MBA, CPC
Administered by the Department of Labor (DOL), the Employee Retirement Income Security Act (ERISA) provides the federal statutory framework for fiduciary compliance standards in 401(k) plans, profit sharing plans, money purchase plans, defined benefit plans, and some 403(b) plans. Three sections of ERISA that receive much attention as they relate to a plan representative’s or a service provider’s fiduciary status are 3(21), 3(38), and 3(16).
There are two main types of fiduciaries for retirement plans: investment fiduciaries and plan administrator fiduciaries.
Investment Fiduciaries
Investment fiduciary responsibilities are usually delegated to an investment professional, which is often referred to as the 3(21) Investment Advisor (whereby the advisor does not exercise discretion in managing plan investments) or the 3(38) Investment Manager (whereby the advisor does exercise discretion in managing plan investments). The Plan Trustee(s) is/are listed in the plan document, and is/are responsible for activities related to the plan Trust, which includes investment management often delegated to a 3(21) or 3(38) fiduciary investment provider.
“Plan Administrator” Fiduciaries
Plan administrator fiduciaries are responsible for the ongoing operation and management of the plan, and are often referred to as the 3(16) “Plan Administrator” fiduciary. The 3(16) fiduciary is usually the retirement plan’s sponsoring employer and its designated plan representatives, but some 3(16) fiduciary responsibilities can also be delegated to the plan’s third party administrator (TPA).
In this article, we will focus on the responsibilities of a retirement plan’s 3(16) fiduciaries and how delegating some of those responsibilities to a service provider can limit the employer’s fiduciary responsibility and reduce the administrative burden that is associated with maintaining and operating the plan.
Who is a 3(16) Fiduciary?
The “Plan Administrator” is named in the plan document. While it can be an individual, in most plan documents the Plan Administrator is the retirement plan’s sponsoring employer. Fiduciary functions are delegated to one or more plan representatives; it is not necessary for an individual to sign the plan document in order to be considered a fiduciary.
Fiduciary status ultimately depends on whether the individual or party has responsibility in the administration of the plan and/or exercises any discretionary authority or control over the management of the plan. Fiduciary functions include – but are not limited to – the following:
- Establishing a new retirement plan or terminating an existing retirement plan
- Delegating responsibilities to other plan fiduciaries
- Hiring or replacing plan service providers
- Negotiating fees with plan service providers
- Exercising discretion in approving or denying distribution and loan requests
- Making discretionary amendments to the plan
- Signing and submitting the Form 5500 and other required government filings
Who is not a 3(16) Fiduciary?
Other functions are considered “ministerial duties” that do not create fiduciary status because they do not involve discretionary authority or control over the management of the plan. These functions are often performed by employees of the employer or by the plan’s third party administrator (TPA), and include the following:
- Typically performed by the plan sponsor’s employees:
- Distributing notifications, disclosures, and enrollment materials to employees
- Inputting employee plan elections into a payroll system or plan website
- Submitting payroll data and year-end data to service providers
- Submitting payment for service provider fees
- Typically performed by the plan’s third party administrator (TPA):
- Preparing plan documents and employee notifications and disclosures
- Maintaining plan records
- Applying plan provisions to determine eligibility for plan participation and plan benefits
- Preparing government forms
- Calculating employer contributions according to the plan document
- Processing participant distribution and loan requests
The “Plan Administrator” under ERISA Section 3(16) is sometimes confused with the plan’s “third party administrator” (TPA), but it is important for the plan’s representatives to understand that these roles – and terms – are different. Fiduciary status depends on function rather than title, and – because a TPA’s services to the plan are usually considered ministerial duties (listed above) – the TPA is not considered a plan fiduciary unless it accepts a fiduciary role.
Hiring a TPA to act as 3(16) Fiduciary
Because decisions to maintain a retirement plan and to hire certain service providers are made by the plan’s sponsoring employer, the employer will always assume some degree of fiduciary responsibility under ERISA Section 3(16). A retirement plan’s sponsoring employer can, however, delegate some fiduciary responsibilities to the plan’s TPA. By doing so, the employer not only limits its fiduciary responsibility but reduces the overall administrative burden of operating the plan.
Following is a list of 3(16) fiduciary functions that TPAs are often hired to perform for additional service fees:
- Distribution of required employee notifications and disclosures by applicable regulatory deadlines
- Reviewing and approving participant distribution and loan requests
- Signing and submitting the Form 5500 and other required government filings
Some TPAs offer expanded 3(16) services that also include the following:
- Sign the plan document as the named Plan Administrator
- Monitor plan service providers
- Monitor and benchmark plan service provider fees
When are a TPA’s 3(16) Services an Appropriate Fit?
For most employers, deciding to hire a TPA in a 3(16) capacity is a matter of control and cost. When delegating fiduciary responsibilities to a TPA, those responsibilities are no longer performed by the employer. The most obvious benefit is the time savings for the employer’s plan representatives. While this might generally be viewed as a positive, it must be weighed against the extent to which the employer is comfortable giving control of certain fiduciary functions to the TPA rather than performing those functions in-house.
For many employers, the value of time savings for plan representatives far exceeds the costs associated with the TPA’s 3(16) services. Nonetheless – because it is the responsibility of the plan’s fiduciaries to control plan costs – the employer must take steps to ensure that any additional fees for 3(16) fiduciary services are reasonable.
Some TPAs offer the employer a menu of 3(16) services from which to select. Such arrangements are often preferred because they enable the employer to retain certain fiduciary functions and control the costs associated with having a 3(16) fiduciary service provider.
To learn more about your fiduciary responsibilities and whether your organization and your retirement plan participants might benefit from 3(16) fiduciary services, please contact The Retirement Plan Company, LLC at 888-673-5440, option 4.