Is Becoming a 3(16) Plan Administrator Right For You?
There’s a lot of talk in the retirement industry these days about becoming a 3(16) Plan Administrator to plan sponsor clients. As someone with 40 years’ experience as a TPA named fiduciary (with my other company, Alpha & Omega), I have some strong opinions on the subject. But first, let’s look at what it means to serve as a plan fiduciary.
Under ERISA Section 3(21), a plan fiduciary is defined as an individual that:
- Has discretionary authority or control with respect to management of the plan or disposition of plan assets
- Renders investment advice for a fee; or
- Has discretionary authority or responsibility for the administration of the plan
ERISA Section 3(38) also defines a fiduciary as someone who agrees in writing to be an investment manager for the plan, having the power to manage, acquire or dispose of any assets of the plan. This individual must be a registered investment advisor under the 1940 Act or registered with the state.
ERISA Section 3(16) offers a third fiduciary definition for individuals who serve as plan administrators. These people agree to take full responsibility for the daily operation of the plan, or in some cases, only specific functions.
For TPAs, this means that if you take on the role of 3(16) Plan Administrator for a client, you are their Plan Administrator – with all of the trimmings. You interpret the plan documents. You make all of the appropriate reporting, disclosures and vendor selections. You evaluate and monitor other plan fiduciaries, service providers, plan investments, and the reasonableness of all plan fees and contracts – all in addition to your regular TPA responsibilities.
The Upside of 3(16) Plan Administration
As a TPA who has acted as the named plan fiduciary for many years, I see three potential benefits to taking on the 3(16) Plan Administrator role:
- Ability to increase fees. With the increased service levels and risk liability, TPAs should be able to significantly increase fees. Or at least, that is the goal.
- Point of differentiation. Many TPAs are looking at 3(16) services as a way to stand out from the competition. However, unless you act as a true fiduciary for the client, this may not be the case.
- More control over plan administration. As a 3(16) Plan Administrator, you can better ensure that the plan, the plan sponsor and the participants receive the benefit of your experience and expertise. Small to midsize plans, and plans that fall under the professional corporation’s status, can also avoid dealing with unique high-risk assets and the investment “flavor of the month.”
These benefits may sound attractive. But TPA firms typically process a high volume of work, and being a 3(16) Plan Administrator is a very different animal. It demands attention to details from highly trained administrators well versed in the law. It requires keeping in-depth minutes of all plan proceedings, and dotting all the “I’s” and crossing all the “T’s”. Most of all, it requires having a real understanding of what it means to be a steward – a mindset that, in my opinion, is currently lacking in our industry.
When it comes to administering qualified plans, the TPA community does an outstanding job in consulting – especially in plan design and day-to-day compliance and administration work. However, I wonder if the TPA community as a whole is ready to step into a truly fiduciary role as a steward of the plan and to its participants.
You Can’t Be a Little Pregnant
What are the downsides to becoming a 3(16) Plan Administrator?
- Lack of resources. Currently, few TPAs – especially solo practitioners and smaller companies – have the infrastructure or trained staff to take on the duties and responsibilities of a true 3(16) Plan Administrator.
- Risk of client turnover. Every time a client gets a new CFO, controller, or head of HR, you have to work twice as hard to keep your position as Plan Administrator. New hires typically like to bring on people they know and trust, and they may not see the value in your services.
- Greater liability risk. Acting as a 3(16) Plan Administrator carries a lot of liability. My recommendation would be to carry a lot of insurance and hope you never have a claim. With the increased risk, the day may soon come when insurance underwriters will either refuse to renew your coverage or raise premiums to astronomical levels.
So far, only a handful of TPAs have accepted the role of full 3(16) Plan Administrator. Instead, most of those serving in this capacity are limiting the contractual services they agree to provide and accept fiduciary liability for. Which is like telling people you’re a “little” pregnant. If you agree to accept fiduciary responsibility – even a little – you had better be prepared to blow the whistle if you even think there might be a problem with the ongoing plan administration. The consequences are the same whether you’re in all the way or only partly.
If something happens and you’re not prepared, the argument that your expertise lies only in those areas carved out in the agreement will not offer a very good defense. Just look at ERISA Section 405 if you need convincing.
Marketing Gimmick or Valuable Service?
From a financial standpoint, the big question is whether the market is willing to pay for 3(16) Plan Administrator services, and if so, how much? Based on my experience, I would say not at this time.
When one of our Alpha & Omega clients leaves, I explain that their new administrator will not sign the 5500 form. They will not allow themselves to be identified in the plan document as the plan administrator-named fiduciary. And they will not accept or acknowledge they have a fiduciary responsibility. The departing client’s reaction to this news is typically lukewarm at best.
Most TPA consumers understand the concept of finding someone to insulate their fiduciary duty. But, so far, they don’t place any special value on this type of service. Furthermore, I see no evidence to suggest that they will suddenly develop an appetite for it. What they’re really saying is they don’t see any headlines about “Joe Plan Sponsor” getting indicted for violating his fiduciary duty, even though “Joe” may have been fined, sent to jail, or both.
So is there a viable market for 3(16) Plan Administrator services?
My company has offered these services since 1975. We continue to offer it because accepting fiduciary responsibility is deeply embedded in our culture, and we think it is the right thing to do. However, based on the current lack of understanding in our industry around fiduciary responsibilities, I don’t foresee a sustainable market for these services. At least, not in a watered-down fashion as some TPAs are attempting to do.
We may see isolated cases where a plan sponsor requests this kind of service. But until more plan sponsors end up paying fines or going to jail, I can’t see consumers placing a dollar value on 3(16) Plan Administration services. My hope is that if enough TPA firms offer this service, plan sponsors might begin to take it seriously. Until then, most plan sponsors will likely view it as little more than a marketing gimmick.
To the handful of TPAs currently operating as true 3(16) Plan Administrators, I say let’s keep trying to prove this is a service whose time has come and is long overdue. Maybe then plan sponsors will recognize the tremendous value a true 3(16) Plan Administrator brings to the table.
PenChecks Trust Company of America (PenChecks Trust) is a statechartered, non-depository trust company and the largest independent provider of outsourced benefit distribution services and Default/Missing Participant IRAs in the country. With 20 years in business, PenChecks Trust is an expert and industry-leading provider of unique and comprehensive solutions for a myriad of trust resolution issues. Services include automated and branded solutions for benefit payment processing, uncashed/stale dated checks, Abandoned Plan/QTA services and Taxable Savings Accounts. Customers include financial institutions, third ¬party administrators, plan advisors, and plan sponsors.