Managing a retirement plan can be complicated and overwhelming. It’s time to address these administrative difficulties and discover how a 3(16) fiduciary could benefit your retirement plan and its participants.
3(16) Fiduciary: An Outsourcing Option
Every retirement plan must have a designated person who handles the administrative duties. According to ERISA Section 3(16), the plan administrator is responsible for providing summary plan descriptions (SPDs), delivering proper and timely fee notifications, filing and signing the plan’s Form 5500, maintaining the plan’s tax-qualified status and ensuring the plan is operating in accordance with the plan document. Human resource (HR) and benefit professionals often fill this role. Because these individuals typically wear many hats, the organization’s retirement plan may not be a top priority and the plan details could fall outside their expertise. Given the complexity, number of federal regulations and endless nuances related to plan management, it’s not surprising that many feel intimidated. Outsourcing the operational duties to a 3(16) fiduciary could lift this burden and add additional protection to the plan.
There are pros and cons to hiring a 3(16) fiduciary. It’s important to be aware of the benefits and drawbacks before moving forward.
- Smaller Administrative Burden – Plan sponsors often oversee several organizational functions, so delegating some of the retirement plan’s administrative responsibilities could allow them to focus on other projects. Tasks such as tracking eligibility, processing distributions, confirming vesting percentages, updating auto-enrollment and auto-escalation reports, signing off hardship requests and more could be completed by a 3(16) fiduciary.
- Fiduciary Protection – Using a 3(16) fiduciary transfers some of the operational risk away from the organization. For example, under the current model of most plans, the named plan administrator is responsible for signing off on discrimination tests. Most HR and benefit professionals don’t know if the tests are 100% accurate. They rely on the service provider and sign off based on good faith. A 3(16) fiduciary will conduct the test, sign off as the plan administrator and take on the fiduciary responsibility for its accuracy. Another example is the filing of a Form 5500 in which a service provider provides a signature-ready form for the plan administrator to sign and file. The plan administrator is responsible for the accuracy of the information won the Form 5500 and trusts that it was done correctly. A 3(16) fiduciary would not only produce the Form 5500, but also sign and file. If for some reason it is deemed inaccurate or filed late, the 3(16) fiduciary would be responsible for any corrections or penalties.
- Cost – Hiring a fiduciary means additional cost. The cost is determined by factors such as total plan assets, number of participants and plan design complexity. Fees can range from $2,500 to $10,000 and are paid out of pocket by the plan sponsor or, more commonly, out of the plan assets or forfeiture accounts. For some smaller organizations with simple plan designs and low turnover, there may not be a need to spend additional money to engage a 3(16) fiduciary. Consider a small medical practice with 10 employees and a safe harbor plan. It’s unlikely that this organization hires or terminates people on a regular basis, so tracking eligibility and processing distributions is not a burden. The safe harbor plan design protects them from discrimination testing, so that is not an issue. The only significant responsibilities include delivering notices in a timely manner and filing the Form 5500. The administrative burden is small and probably doesn’t warrant the expense of a 3(16) fiduciary.
- Conflicts of Interest – Be wary of organizations that promote investment manager services in addition to administrative support. This may sound appealing, but the 3(16) fiduciary selecting itself as the investment manager could be a source of conflict. While not illegal, it does not relieve the plan sponsor of responsibility for the actions and potential errors of the investment manager.
Get Support Where It’s Needed
Organizations that are sensitive to retirement plan responsibilities are good candidates for a 3(16) fiduciary. They often already have a 3(21) or 3(38) fiduciary looking over their investments, so hiring a 3(16) fiduciary is a natural step toward full fiduciary protection. If day-to-day plan management is overwhelming your plan administrator, it’s time to consider outsourcing this function to a knowledgeable professional who can lighten the administrative burden.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through SilverStone Asset Management. SilverStone Asset Management and SilverStone Group are independently owned and are not under common ownership with M Holdings Securities, Inc.
This information is provided for educational purposes only and should not be construed as advice. You should discuss your situation with a financial professional before making any decisions.
This article originally appeared in the 2018 | ISSUE ONE of the SilverLink magazine, under the title “Easing the Administrative Burden.” To receive a complimentary subscription to the SilverLink magazine, sign up here.