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Why Hire a 3(16) Plan Administrator? Ask the Lawyer

Retirement Committee Education

WHY HIRE A 3(16) PLAN ADMINISTRATOR? by Carol Buckmann

Why Hire a 3(16) Plan Administrator? Plan sponsors, plan fiduciaries and plan advisors should all be able to answer the question, Is your 401(k) recordkeeper the ERISA plan administrator?  What about the vendor that provides your plan documents and communications? It is very likely that the answer to each of these questions is “no”, though many plans sponsors mistakenly assume that one of these third-party providers is the legal plan administrator and they are not.

The Distinction is Important

ERISA Plan Administrators are responsible for plan testing, plan communications, ruling on plan claims and appeals, filing Form 5500 and many other activities required by ERISA. ERISA Plan Administrators are subject to penalties if filings are late or for failure to comply with other legal requirements. Even though you look to your provider or recordkeeper to handle these matters for you, if you read their service agreements, you will usually find statements that your provider and recordkeeper are not the administrators and you as the plan sponsor are still legally responsible for the plan’s compliance with all administrative requirements. If they make a mistake that subjects you to penalties, your only recourse is if you have rights under the agreement’s indemnification clause.

3(16) Administrators

There is a special service provider you can hire to take over these legal responsibilities, called a 3(16) administrator after a provision in ERISA. More plans are considering hiring 3(16) Administrators, but like all methods of outsourcing fiduciary responsibility, there are pros and cons to consider before signing on the dotted line.

Pros

  • If you are too busy running your business to devote as much time as needed to your plan responsibilities, the right 3(16) Administrator can eliminate the risk of failing to meet deadlines or doing things incorrectly.
  • Some arrangements provide that the administrator may also select an investment professional for plan investments, relieving you of that responsibility as well.
  • The 3(16) Administrator will also sign your required filings and distribute required communications, as well as making sure required amendments are made timely.
  • If the 3(16) administrator hires an investment manager described in section 3(38) of ERISA to assume fiduciary responsibility for investments as well (although this is not part of every service), you will not have hiring responsibility or potential liability based on day-to-day investment decisions.

Cons

  • You are still responsible for prudently selecting and monitoring the 3(16) Administrator. The plan sponsor cannot delegate 100% of the responsibility.
  • These arrangements are not fungible. Not all 3(16) Administrators take on all ERISA responsibilities. For example, some may take over only filing and communication responsibilities. You need to determine whether the service agreement fits your needs and make sure that any responsibilities that aren’t delegated are assigned to someone else.
  • You lose control over how things are handled. For some plan sponsors, that might be a deal-breaker.
  • You may not be able to maintain a complicated plan that doesn’t fit within the Administrator’s service capabilities.

What are the alternatives?

Unbundled Arrangements.

An alternative arrangement in which you retain the decision-making power to select individual service providers might better suit your needs. For example, you can hire a 3(38) investment manager yourself to take care of the plan investment menu or to actually manage participant accounts. You can hire a specialist to perform complicated plan testing and an ERISA attorney to help make sure that any required or discretionary plan amendments are adopted by the applicable deadlines.  This may enable you to maintain a complicated plan and have better service. However, not all service providers will be fiduciaries and selecting providers on an individual basis may also be more expensive.

What about a MEP?

A multiple employer plan, or MEP, is an alternative that has generated a lot of interest lately. In a MEP, unrelated employers invest in a pooled plan run by a professional fiduciary who can serve as the plan’s 3(16) Administrator. MEPs are attractive because they provide cost savings and offload fiduciary responsibility, but they carry risks under current law. The primary risk is the “one bad apple” rule providing that a qualification problem of one employer may disqualify the entire plan. IRS has proposed regulations to end this rule for defined contribution plans, though they are not effective yet, and the SECURE Act already passed by the House would repeal the rule for certain plans. If the only relationship among the employers is adopting the plan, under current law they need separate 5500s and plan audits.  Some MEP arrangements may delegate less responsibility than others, depending on the plan terms.

If passed by Congress, the SECURE Act would establish a new kind of MEP called a “pooled employer plan”, or PEP, that would be run by a professional “Named Fiduciary” registered with the IRS and leave adopting employers with a minimal level of fiduciary responsibility. PEPs would be attractive options for many employers, but if the SECURE Act passes, they wouldn’t be allowed until 2021.

Consult Your ERISA Attorney

Administration and service agreements vary. If you want to outsource your fiduciary responsibility, you should consult your ERISA attorney to verify or make certain the agreement appoints the provider as a “named fiduciary” under ERISA, has terms and fees typical in the market and covers everything you want to delegate.

Carol Buckmann is a founding partner at Cohen & Buckmann PC and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefits issues.

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