PenChecks Blog

Is the 3 (16) Plan Administrator Role 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. But what exactly does that entail, and how would it benefit TPA firms? 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:

  1. Has discretionary authority or control with respect to management of the plan or disposition of plan assets
  2. Renders investment advice for a fee; or
  3. Has discretionary authority or responsibility for the administration of the plan

Under ERISA Section 3(38), an individual is also considered a fiduciary if he or she 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. If not registered under the Act, individuals must be registered with the state. A fiduciary can also be a bank or an insurance company.

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, services providers, plan investments, and the reasonableness of all plan fees and contracts – all in addition to your regular TPA responsibilities. (For legal definitions of “plan administrator” and “plan sponsor”, visit https://www.law.cornell.edu/uscode/text/29/1002> and scroll down to #16.)

The Benefits 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 keep in mind that 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 people who excel at keeping in-depth minutes of all plan proceedings, and who insist on 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, I believe the TPA community does an outstanding job in consulting – especially in plan design and day-to-day compliance and administration work. In fact, I have yet to find any other group that is so dedicated to their craft and has performed the ministerial and consulting functions so well. 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.

Agreeing to act as a 3(16) Plan Administrator may offer potential advantages to TPA firms, but there are two sides to every story. I’ll address the potential downsides, including the significantly higher liability risk, in my next blog.

In the meantime, here’s a good article that identifies several key points to look for in a fiduciary agreement: http://rolandcriss.com/practical-tips-for-avoiding-fiduciary-trouble/how-do-you-spell-fiduciary-r-e-l-i-e-f.

Peter E. Preovolos, President, PenChecks Trust

One Response to “Is the 3 (16) Plan Administrator Role Right For You?”

December 17, 2015 at 12:40 pm, Andres said:

As Non-producing TPA’s we frequently have 4 or 5 cltines for every plan. We have the financial adviser who likely referred in the Plan Sponsor. We have the business owner, who is always too busy to meet with us for a plan review, but can’t remember who we are when contacted by a new broker. Or the owner who gets a divorce and cleans house wholesale, because we were hired by her ex. (That one eventually hired us back!) We have the payroll person who talks to us every week and is heartbroken when the business owner changes TPAs without asking them. We have the HR/office manager who talks to us every month and who we jump through hoops for to make her life easier, but also isn’t in the meeting with the new financial adviser when he wants to save the business owner money by bundling his 401(k). We’ve also been known to take the fall for the HR or payroll person who screws up the deferral allocations every year, because if it is our fault, he gets to keep his job. So, do we have happy cltines leave us? We can have 4 happy cltines in a plan and one that wants to make points or save money and out we go. Yep, happens all the time ..

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