As more defined contribution (DC) plans like 401(k)s look to outsource work and fiduciary liability, there’s a service growing in popularity called a 3(16) fiduciary. Unlike a 3(38) fiduciary where the employer sponsoring a DC outsources the selection and monitoring of investments, giving that third party full discretion, 3(16) fiduciaries take on administrative tasks as well as monitoring the performance of service providers in relationship to fees for service providers like record keepers, TPAs, CPAs and advisors. But not all 3(16) fiduciaries are the same and, beyond the duty to monitor, these fiduciaries should take steps to remedy the problems when discovered.
The U.S. Supreme Court case Tibble v. Edison dealt with imprudently monitoring and not replacing investments – the plan sponsor claimed that the funds, when originally selected were prudent, and that claims after the statutory of limitations expired were not allowed even if the funds were no longer prudent. The Court disagreed and went on to say that in addition to prudently monitoring service providers like investment managers, when issues are discovered, they have the duty to remove them.
Which brings up to the issue of different types of 3(16) fiduciaries. If all they do is check the box but don’t take remedial steps, then what’s the real value of their services? And service providers, like record keepers or TPAs acting as a 3(16), cannot be expected to monitor their own services and fees recommending removal if issues are found.
Even by outsourcing administrative duties under section 3(16), plan sponsors are not relieved of their fiduciary duty. They must determine if the 3(16) is capable and then ensure that they are performing their duties prudently. Just keeping a checklist without taking action or recommending remedial actions is really not helpful at all.
Lessons learned:
- Make sure the 3(16) fiduciary is capable and is performing their duties prudently.
- The 3(16) should be empowered to fix problems or alert the plan sponsor of issues with recommended action.
- Remove conflicts of interest – does it make sense for a TPA, for example, to monitor their own services?
