Should We Get a 3(16) Administrator? by Ilene Ferenczy
See if this describes you:
I feel like my company’s 401(k) plan is running me, rather than the other way around. I’m continuously getting notes from my TPA (third party administrator) telling me to do this or that or approve something, and I have absolutely no idea what I’m doing. And, to make it worse, the TPA keeps warning me that I’m a fiduciary and I can be sued for these things I’m supposed to know about. I wish there was some way for me to offload these administrative duties to someone else.
Is there a solution for this?
One of the new trends in service providers, particularly for 401(k) plans, is so called “3(16) Administrators.” This phrase applies loosely to service providers who take on some amount of fiduciary duties normally applicable to the Plan Sponsor. The idea is that the Plan Sponsor gets a level of professional plan administration for areas that it controls but knows nothing about.
In other words, a 3(16) Administrator appears to be just what the doctor ordered for the plan sponsor discussed above.
Is 3(16) Administration Really the Answer?
Maybe. The key here is what you want to offload and what the 3(16) Administrator you choose actually does. Some 3(16) administrators take on a large amount — perhaps almost all — of the non-investment fiduciary duties that are borne by the Plan Sponsors. Others take on fairly limited responsibilities, usually tied to approving distributions and loans and signing the annual IRS forms. Both models — and everything in between — are valid, so long as you understand what you are getting and what you are paying for these services. How to evaluate this? Get the 3(16) Administrator to give you a detailed list and explanation of what it is doing for the money. (Even better is if you get a list of what the 3(16) Administrator does and what duties are left to you to do.) If this is hard to do, go elsewhere for the services
One important caveat: Appointing another person to take on fiduciary duties is, in itself, a fiduciary act. This means that you must prudently select the 3(16), Administrator. We recommend you check into the 3(16) administrator’s qualifications and experience, as well as those of the people who will actually do the work in the administrator’s office. Getting references is a good idea, too. Also, you must monitor the activities of the 3(16) administrator, considering periodically whether you should continue the relationship, stop using the services, or get a new provider for the services. To do this, get the 3(16) Administrator to give you an annual report of what actions it actually took during the Plan Year.
So, in short: 3(16) Administrators may be just what you need. But, make sure you know what they are going to do and what responsibilities remain in your wheelhouse. Then, hire the best 3(16) administrator for your needs, and monitor the work carefully.
Ilene H. Ferenczy, Esq., CPC, APA is the managing partner and thought leader for Ferenczy Benefits Law Center, an Atlanta firm focusing on the practical issues affecting retirement plans, the companies that sponsor them, and the people who service them. She is the author of five books and more than 100 articles about retirement plans and is a former third-party administrator.
