By: Gary L. Simon Jr., QPFCRegional Vice President of Sales

3(16) fiduciary services, also referred to as 3(16) plan administrators, are one of the fastest-growing sectors of the retirement plan industry today. Utilizing a TPA that can offer these services is growing in demand. Let’s look at three main areas of this hot topic:

• Plan Sponsor awareness of administrative fiduciary responsibility

• Why Plan Sponsors should consider hiring a 3(16) Fiduciary Service Provider

• And what administrative burden a 3(16) Fiduciary can reduce for the plan sponsor

401(k) plan sponsors have administrative Fiduciary responsibilities, but are they aware?

This article aims to help make plan sponsors more aware of their legal obligations as plan administrators, and the benefits of appointing a 3(16) Fiduciary Services Provider.

Of the four plan designations that qualify as fiduciary roles, the category that has the least amount of awareness is Plan Administration. Only 4% of plan sponsors recently surveyed (AllianceBernstein 2020) are aware of or understand their fiduciary role as plan administrators. If an employer fails to act in a way that upholds fiduciary duty, for example, by failing to make decisions in the best interest of their employees, they may be held personally liable. Click here for the survey.

Qualified Plan professionals can help the industry by bringing more awareness to plan sponsors, and a solution to help with these roles. Finding a 3(16) Fiduciary Service Provider to partner with can help.  

Why hire a 3(16) Fiduciary Services Provider?

If an employer hires a 3(16) Fiduciary Service Provider to function as a “Plan Administrator,” a set of duties can be outlined and fulfilled that many plan sponsors find demanding. Many of these duties include keeping the plan compliant with ERISA guidelines. Compliance failures can be costly if these ERISA guidelines are not met.

A sponsoring employer can delegate some of these fiduciary roles and limit their fiduciary responsibility. If they choose to hire a 3(16) Fiduciary Service Provider, they can also reduce their overall administrative burden of operating a plan.

What administrative burden can the 3(16) Fiduciary take on?

Each service provider may offer a different level of 3(16) fiduciary services they’ll perform on behalf of an employer. Here are some examples of what those services may be:

  • Tracking Eligibility and Delivering Enrollment Material. Most 401(k) plans have eligibility requirements. A plan sponsor can hire a 3(16) Fiduciary to track eligibility and deliver enrollment material to the employee once they are eligible to participate.
  • Approving Participant Distributions. The Plan Sponsor may allow for loans or hardship withdrawals. This can be burdensome to many plan sponsors. A 3(16) fiduciary service provider will review and approve distribution and loan requests instead of distribution and loan requests needing to be reviewed and approved by a plan sponsor. The 3(16) Fiduciary can take the employee’s call, approve the distribution, and cut them a check.
  • Distributing Plan Notices to Employees. A plan sponsor is required to distribute plan notices to all employees timely. A TPA typically prepares all required employee notifications and disclosures (Summary Plan Descriptions, Summary Annual Reports, Investment and Fee Disclosures, and Safe Harbor Notices) and sends them to the plan sponsor to be distributed to employees. A 3(16) Fiduciary Service Provider can coordinate delivery of these notices directly to the employees instead of delivery being coordinated by the plan sponsor.
  • Signing the 5500. Anyone prospecting 401(k) plans can find out who the plan administrator or decision maker is by simply going to Free ERISA and looking up their 5500 by company name. What if the TPA was the plan administrator? A TPA typically prepares a signature-ready 5500 and Form 8955-SSA each year. It is then signed by the plan sponsor and filed. A 3(16) Fiduciary Service Provider can e-sign/e-file Form 5500 and Form 8955-SSA instead as the Plan Administrator. Those prospecting would be calling the 3(16) Fiduciary Service Provider.

From ongoing communications between employees and service providers to filing paperwork with government agencies, plan sponsors need ongoing support to stay compliant with the law. For that reason, many small and medium-sized businesses should find it very helpful to hire a 3(16) Fiduciary Services Provider to serve as the plan administrator and offset much of the administrative work.

When a business is looking to select a TPA for their administrative services, consider selecting a TPA that can take on these 3(16) Fiduciary responsibilities. As the plan’s administrator and 3(16) Fiduciary Services Provider, a TPA that can handle the day-to-day operations and compliance-related tasks of your 401(k) can help mitigate the plan sponsor’s fiduciary liability and reduce their administrative burden.

For more information please contact us.