Is There a Market for 3(16) Plan Administrator Services?
Lately, there’s been a lot of conversation in the TPA community about the benefits of becoming a 3(16) Plan Administrator. (See these earlier blogs, Part 1 and Part 2 for my thoughts on the pros and cons of this issue).
What seems to be missing from the discussion is any meaningful analysis as to whether the market is willing to pay for such services, and if so, how much. When consumers don’t see the value, it can be hard to collect a premium for those services, let alone convince them they need it. Based on 40 years’ experience acting as a TPA 3(16) Plan Administrator, I doubt whether most consumers of TPA services are ready to see the value.
No Compelling Reason to Buy
When one of our clients leaves, I ask if they realize that their new administrator will not:
- Sign the 5500 form
- Allow themselves (the TPA firm) to be identified in the plan document as the plan administrator-named fiduciary
- Accept or acknowledge they have a fiduciary responsibility
As a 3(16) Plan Administrator, we do all these things and more for our clients. Yet, based on an old court case (involving Hewitt/Aon) which determined that TPAs are not fiduciaries when it comes to the work they perform, most TPAs do not consider themselves fiduciaries. In fact, the courts consider the work TPAs perform to be a ministerial function, such as the application of the plan’s eligibility rules, collecting contributions, preparing the 5500, and similar activities.
My personal experience has been that most TPA clients place no special value on this type of service. Furthermore, I see no evidence to suggest that they will suddenly develop an appetite for it. Although TPA consumers understand the concept of finding someone to insulate their fiduciary duty, they don’t value it as highly as administrative functions. 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.
When we administer our Abandoned Plan (QTA) services at PenChecks, the DOL requires us to locate and advise plan fiduciaries and trustees that the plan is being considered for termination under the Abandoned Plan rules. The idea is to hopefully convince them to step up to the plate and terminate the plan. When searching for former plan fiduciaries, it’s amazing that we frequently locate them in jail. However, all this activity occurs through the DOL, so the public rarely hears of someone going to jail for violating their fiduciary responsibility.
Marketing Gimmick or Valuable Service?
Is there a viable market for 3(16) Plan Administrator services?
My other company, Alpha & Omega, 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 for our clients. 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. The consequences are the same whether you’re in all the way or only partly, so don’t pretend. Just look at Section 405 of ERISA if you need convincing.
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.
Peter E. Preovolos, President, PenChecks Trust