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The Problem with 3(16)

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Over the last few years, we’ve seen the proliferation of companies offering ERISA §3(16) services. This is a natural growth of advisors offering ERISA §3(38) services, so 3(16) was a great way for third-party administrates (TPAs). Like 3(38), TPAs and other providers could offer 3(16) as an outsourcing solution where employers can outsource the headache of plan administration to a 3(16) named fiduciary.

The “Plan Administrator” of a qualified retirement plan is defined in section 3(16) of ERISA. The Plan Administrator should not be confused with a “Pension Administrator” or a TPA.

Unlike the TPA, the Plan Administrator actually has the following primary responsibilities:

◦     Ensures all filings with the federal government (form 5500, etc.) are timely made;

◦     Makes important disclosures to plan participants;

◦     Hires plan service providers if no other fiduciary has that responsibility; and

◦     Fulfills other responsibilities as set forth in plan documents.

A TPA is delegated these responsibilities, but the plan sponsor bears the responsibility. The §3(16) fiduciary/administrator assumes that responsibility, as the plan sponsor outsources it.

This is great, isn’t it? While I have been working with TPAs and financial advisor in trying to help them offer these services (cheap plug), I do see an issue? Unlike a §3(21) or §3(38) fiduciary that requires some sort of registration as a financial advisor, a §3(16) administrator much like a TPA does not need any accreditation. So nothing would stop someone from coming in out of nowhere and proclaiming themselves as the king or queen of 3(16) fiduciaries without having either the competence and/or honesty to be one. This industry has had its share of incompetent and/or fraudulent plan providers and without any requirement to be one, there will be an issue when a 3(16) administrator does go badly. Just look at the Vantage Benefits fiasco where a Dallas based TPA offering 3(16) stole millions in plan assets.

Another issue is that there is a wide variety of services that ERISA §3(16) may offer from a heavy 3(16) where they offer support with payroll reports and a light 3(16) where they may not even sign the Form 5500. So as a plan sponsor searching for 3(16) providers, you need to vet them as well as understanding what services they may actually provide.

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