I think we can all agree that ERISA is an interesting yet somewhat complicated document – especially for those who don’t spend a large amount of their time reading and interpreting it. For larger employers with an experienced HR staff, complying with ERISA as it pertains to their Plan Administrator duties is probably not a big issue. However, for the smaller employer or any organization that experiences office staff turnover it certainly can be challenging potentially resulting in increased fiduciary risk.
The new 3(16) services that have popped up over the past few years are a fit for those Plan Sponsors are looking to offload some of these duties to focus on running their business.
When talking about outsourcing ERISA 3(16) fiduciary duties, there are many terms that seem to be used interchangeably…Administrator…Plan Administrator…3(16) Fiduciary…3(16) Named Fiduciary…3(16) Services…3(16) Fiduciary Services…
In our experience, the term 3(16) is used in discussions about outsourcing in ways that don’t always line-up with the way they are defined by ERISA. And, admittedly, it can be confusing.
Yet, for employers, it’s critical to be clear about what duties and liabilities they are retaining.
ERISA specifically identifies and defines the term “Administrator” (not to be confused with a Third Party Administrator) under Section 3(16)(A). It defines the Plan Administrator as the person or entity “so designated” under the Plan. It’s important to note that, if the Plan document does not specify an “Administrator,” the Plan Sponsor serves in that role, retaining all the duties Administrator duties. As a practical matter – and in most of the plans we see, the Plan Sponsor will normally not specify a Plan Administrator and will, therefore, retain the Plan Administrator functions by default.
While a Plan Sponsor may appoint an independent fiduciary to serve as the ERISA section 3(16) Plan Administrator, there are very few firms offering 3(16) fiduciary services that will accept that role of being a named fiduciary in the plan document.
Most often when a provider is using the “3(16) Fiduciary” or “3(16) Fiduciary Service” designation, they are offering a limited set of plan administrator services – some services may be fiduciary services while other may be non-fiduciary. For example, a 3(16) fiduciary or 3(16) services agreement may handle all participant communications or communications and loan/hardship approval.
You need to read the fine print. Is the Plan Sponsor allocating the Plan Administrator duties to a 3(16) Fiduciary who is named in the plan document or are they delegating duties to a 3(16) Service Provider?
The point of this isn’t about the need to use technically correct ERISA terminology (although it doesn’t hurt) but to make sure Plan Sponsors understand what is meant by the terminology being used. To assist the Plan Sponsor in your role as the trusted advisor, there is a big opportunity to make sure your client/prospect understands what it is they’re looking to outsource and how that compares to exactly what they’re getting. And as importantly, fiduciary responsibilities they retain.
Here are a few suggestions on what should be discussed:
- What are the qualifications of the service provider?
- What exactly are the 3(16) services being provided?
- Are the services being allocated (in the plan document) or delegated (in an outside service agreement)?
- Determine/clearly understand all the services the 3(16) service provider will not provide – which means the plan sponsors understand the responsibilities that still belong to them.
- There should be a full transparency and disclosure of fees and no conflicts of interest.
- Determine the exit strategy. What are the terms for either party to end the agreement and are there any termination fees?
Keep it simple. The agreement should be pretty straight forward (not like when you’re getting a mortgage) and be sure to check for and understand the disclaimers!