Retirement Plans

The Advisor As 3(16) Administrative Fiduciary

How you can add value to your clients that can help reduce workload, costs and risks

by Robert Baumgarten

Mr. Baumgarten is vice president of retirement plan sales at Standard Insurance Retirement Services, Inc. (The Standard). Visit www.standard.com

Retirement plan administration is complex, and plan sponsors are subject to a number of ongoing requirements to maintain compliance. If those responsibilities are not met, employers can face fines or even legal consequences. When risk management is a priority, you can remind your clients that a plan provider can shoulder the responsibility for many plan tasks as a 3(16) administrative fiduciary. By managing a plan’s administrative requirements and ensuring they are met, advisors can help clients reduce their workload, costs and risks.

Administrative noncompliance can lead to costly errors

While no employer intends to make a mistake administering its retirement plan, errors can occur. For example, the Employee Benefits Security Administration (EBSA) received more than 170,000 worker complaints regarding retirement plans in 2018, with actions against employers resulting in individual indictments and the recovery of more than $443.2 million in benefits on behalf of workers.1

There are numerous errors that can lead to increased fiduciary risk for employers. The most prevalent include:

  • Incorrect definition of compensation
  • Failure to provide proper participant notices
  • Failure to include or exclude certain employees
  • Exceeding contribution limits
  • Incorrect handling of hardship distributions or loans
  • Failure to file Form 5500 (to satisfy annual reporting requirements under Title I and Title IV of the Employee Retirement Income Security Act of 1974 [ERISA] and under the Internal Revenue Code)

A common way to help reduce those risks for employers is by having their retirement plan provider serve as an ERISA 3(16) administrative fiduciary for critical plan duties.

Plan providers can manage numerous tasks as an administrative fiduciary

As a 3(16) administrative fiduciary, retirement plan providers complete tasks and accept full fiduciary responsibility in writing for those duties they have agreed to perform. This may include the accurate and timely completion of standard plan duties, such as: the delivery of participant notices, statements and disclosures; compliance testing; eligibility monitoring and notifications; and the review and management of loans, hardship distributions, withdrawals and qualified domestic relations orders (QDROs). Providers that offer the most complete 3(16) administrative fiduciary services provide “hold harmless” clauses which indemnify and protect the employer against claims.

While no employer intends to make a mistake administering its retirement plan, errors can occur. For example, the Employee Benefits Security Administration (EBSA) received more than 170,000 worker complaints regarding retirement plans in 2018, with actions against employers resulting in individual indictments and the recovery of more than $443.2 million...

Designated 3(16) administrative fiduciaries also can assume responsibility for some or all of the following:

  • Getting participants to act by providing clear and timely delivery of required notices
  • Removing privacy concerns and uncertainty from the loan and distribution process
  • Preparing, signing and filing Form 5500 as an authorized service provider

By having their retirement plan provider serve as a 3(16) administrative fiduciary, employers can realize time and cost savings, gain peace of mind, and reduce their liability and risk of an audit as well as increase their human resources capacity.

Questions to consider for guiding client conversations

As part of their regular practice of bringing practical solutions and options to clients, advisors should consider asking these important questions to both gauge their client’s current state of compliance and remind them of the benefits of designating a 3(16) administrative fiduciary:

  • Are you aware of all required administrative tasks and participant notices?
  • Does your staff prepare, print and mail required participant notices?
  • Can you quantify the time and hard costs spent managing these tasks?
  • In the case of a DOL or IRS investigation or audit, can you prove that all tasks were completed accurately and on time?

Retirement plan administration is complex, and more often, employers look to their advisors to help them handle essential plan responsibilities. By offering to provide the administrative fiduciary support that employers need, advisors can set their practice apart and strengthen the relationship with their client as a trusted partner. ◊

 

 

Endnotes
1. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results.pdf