New flavor of outsourced fiduciary for retirement plans hits the market

Retirement plan service providers want to up the ante in the world of outsourced fiduciary services, touting the latest flavor: an ERISA 3(16) fiduciary plan administrator.
The newest offering of fiduciary duty under Section 3(16) of the Employee Retirement Income Security Act of 1974 includes a variety of tasks: choosing, evaluating and monitoring trustees, service providers, investments and the investment adviser to the plan. They also include evaluating the plan’s fees and delegating responsibilities to other fiduciaries.
The 3(16) plan administrator fiduciary holds the keys to the retirement plan’s day-to-day operation: He or she is responsible for timely reporting and disclosure of participant fees and Form 5500. This person also handles distributions of benefits and administers plan loans and qualified domestic relation orders.
This latest service offering is popping up in an era when plan sponsors have a heightened awareness of their fiduciary responsibilities and are looking to offload some of them so that they can get back to the day-to-day work of running their business. Plan sponsors already can work with certain financial advisers and investment management firms either to share fiduciary duty under Section 3(21) of ERISA or to hand over the investment management duties under Section 3(38).
(Related: 10 things every outsourced retirement plan services agreement should have)
“Over the last decade or so, plan sponsors have become more aware of the fiduciary liability and responsibilities, so we’ve seen more services where plan sponsors can outsource fiduciary responsibility to an entity who will monitor the investments or assist in choosing them,” said Rebecca Kaplan, fiduciary compliance consultant at The Angell Pension Group, a third-party administrator.
That interest has heated up.
“In the last 18 months, we’ve seen a significant increase in activity,” noted Jeff M. Atwell, senior vice president and manager of the trust retirement division at American National Bank of Texas, which provides fiduciary plan administrator services. “Plan sponsors are becoming more informed about their responsibilities, and this is falling in line with what they’re doing to comply with other regulatory issues a business owner has to deal with today.”
But there are potential traps for plan sponsors when it comes to relying heavily on outsourcing those duties.
“When plan sponsors use these services, they start to believe they have no continued responsibility to choosing investments, which of course is a fallacy,” Ms. Kaplan said last month at the National Association of Plan Advisors 401(k) Summit in New Orleans.
And not all 3(16) fiduciary services are built equally.
Fiduciary “lite” for 3(16) includes taking transactional burdens off of the plan sponsor and acting as the quarterback. This means overseeing distributions, loans and any other activity that will alleviate the pressure on the employer’s office manager, according to C. Frederick Reish, a partner at Drinker Biddle & Reath’s employee benefits and executive compensation practice group.
Full-scope 3(16) fiduciary services include decision making, rather than merely lightening the administrative load — for instance, determining whether a domestic relation order is qualified. They also may ensure that elective deferrals are made in a timely manner and ensure that the plan retains its tax-qualified status with the IRS.
“Read the fine print,” Mr. Reish said, referring to the services outlined by a provider of these services. “If they’re a 3(16) for less than seven or eight things, then they’re 3(16) ‘lite,’” he added. “3(16) for everything else would include a robust list of 20 to 30 duties.”
So far, the realm of 3(16) is looking more like the domain for third-party administrators, rather than financial advisers. But advisers working with retirement plans play a key role in screening potential candidates for these outsourced services.
“They can help with the oversight: What experience and expertise does the firm have? Do they know ERISA? What’s their privacy policy?” noted Joe Frustaglio, vice president of private sector retirement plan sales for Nationwide Financial.
Other issues for the plan sponsor and adviser to ponder: What kind of insurance coverage does the 3(16) service provider have? Does the provider have a fidelity bond per Labor Department rules that insures 10% of plan assets up to a maximum of $500,000 or $1 million if there’s company stock?
Bear in mind that this fidelity bond only covers theft of plan assets and nothing else — it’s separate from fiduciary insurance that covers breach of fiduciary duty, said Gary Sutherland, chief executive of the North American Professional Liability Insurance Agency. TPAs may also assume that errors-and-omissions coverage will include the 3(16) services they provide, but most of these policies will exclude coverage pertaining to being a named fiduciary in a retirement plan.
The biggest lesson for advisers and plan sponsors: Outsourcing 3(16) duties or other fiduciary tasks don’t let the plan sponsor off the hook if the provider of those fiduciary services misbehaves. There is no such thing as completely outsourcing fiduciary liability, and plan sponsors still have the responsibility of choosing and monitoring their service providers.
“The best thing for advisers to understand is that it’s a fiduciary decision to choose that 3(16) provider and to monitor them,” said Ms. Kaplan. “They need to help the plan sponsor understand the responsibilities so that when they choose a 3(16) service provider, the employer knows which duties they’ve delegated and which duties they will continue to have.”