Fiduciary Sudoku Part 2– Comprehending ERISA 3(16), Explaining the 3(16) Fiduciary
May 24, 2017—In this second blog in our Fiduciary Sudoku series, our goal is to help you, the employer, understand ERISA Section 3(16) well enough so that you can properly evaluate, hire and monitor retirement plan vendors who offer “3(16)” services. As discussed in our Introduction, “Fiduciary Sudoku – Comprehending ERISA 3(16), 3(21) & 3(38),” vendors who service retirement plans will use the term “3(16)” to describe their service offering. But what is a 3(16) service? Will it make your life easier? Does it alleviate your fiduciary responsibility? Are there levels of 3(16) service?
In short, yes, if you hire a vendor to provide 3(16) service for your company retirement plan you will reduce your administrative burden and reduce your potential administrative fiduciary liability. To what degree, however, depends on the level of 3(16) support your vendor is offering to provide.
First, who is a plan fiduciary for administrative purposes?
As more fully explained in our first blog, ERISA Section 3(21)(A)(iii) states that a retirement plan fiduciary is someone who “Has any discretionary authority or discretionary responsibility in the administration of such plan.”
If you are able to affect plan administrative decisions, or if you are responsible for the management of the plan administration, you are a plan fiduciary (congratulations). For example, if you craft plan eligibility rules, have final authority to approve or disallow a hardship withdrawal, or sign off on the accuracy of the Form 5500, you are a plan fiduciary.
Note that if you perform only ministerial functions for your plan you are not a fiduciary because you have no power to make discretionary decisions. You are simply tasked with implementing the fiduciary’s decision. For example, if you only apply (but not create) the rules for participant eligibility then you are not a fiduciary. If you simply prepare reports or employee communications you are not a fiduciary.
Also, you can be fiduciary for a limited purpose. It is not uncommon for a firm’s HR Director to perform the non-fiduciary ministerial task of disseminating participant disclosures but then to also be a fiduciary by approving (discretionary authority) a terminated employee’s vested benefits which were calculated (ministerially) by the plan’s recordkeeper.
3(16) and the big cheese, the Plan Administrator
ERISA 3(16)(A) is the code section of ERISA which defines the Plan Administrator. It is (i) the person specifically designated (named in the plan document), (ii) the plan sponsor if an administrator is not so designated, and (iii) whoever the DOL decides is the Plan Administrator should no one be named and if the plan sponsor cannot be identified.
But nothing in ERISA specifically states that a Plan Administrator is a fiduciary. Yet the courts and Department of Labor agree that the holder of this position is a fiduciary because the very nature of the position gives it discretionary authority and control.
So, what is a 3(16)? They are those - including plan sponsor, its employees and/or plan vendors - who perform the fiduciary role, or part of the fiduciary role, of the Plan Administrator.
A list of Plan Administrator responsibilities can include ultimate responsibility for any or all of the following:
• Determining rules for when a participant qualifies for plan eligibility
• Retaining any plan service provider to assist with administering the plan
• Maintaining all necessary records
• Interpreting the plan
• Timely filing of Form 5500
• Procuring fidelity bonds
• Providing documents including the Summary Plan Description to participants upon request
• Providing participants notices, including safe harbor, QDIA, enrollment kits, SARs, and fee disclosure notices
• Providing participant statements
• Approving participant distribution requests upon termination, loans, or hardship withdrawals
ERISA 3(16) and 405
Now that you are an administrative fiduciary expert (seriously, I suggest that you now know more than many retirement plan service provider representatives) we can, finally, get to the good stuff. ERISA 405(c)(1) allows plan fiduciaries to delegate their fiduciary roles to others. And 405(c)(2) basically says that if a procedure is in place to delegate under (c)(1), then by delegating your fiduciary responsibility to others “… such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility…”.
In plain English, if your plan allows the delegation of a fiduciary role, you so delegate, the receiving party accepts your delegation, the receiving party is qualified to perform the role, and the delegation is memorialized in writing you will properly transfer your administrative fiduciary role to another party and not be liable for their fiduciary breach, if any. This is ERISAs way of encouraging non-expert employer plan sponsors to hire expert service providers.
ERISA 3(16) and your outsourced 3(16) service provider
Arguably the most important point to be made is as follows: when a service provider offers to provide “3(16) services” the sponsor must clearly understand exactly what fiduciary role the service provider will undertake. Do not rely on the marketing materials or vendor’s verbal representations. You must read the service agreement and have a clear understanding of what your service provider is offering to do, and what will be left for you to do. On one end of the spectrum the service provider may offer to be THE named Plan Administrator in place of the employer or employee. They will be listed as the Plan Administrator in the plan document, not the employer. They will be ultimately responsible for all aspects of plan administration. This is a clearly a very high level of service.
On the other end of this spectrum is the more commonly offered 3(16) “lite” services of simply approving participant distribution requests due to termination, loan, and hardship withdrawal. This is a valuable service. But is it very different from the level of service offered by a provider who will act as THE named plan administrator.
Monitoring your 3(16)
One note of caution: the hiring of the service provider is itself a fiduciary act and a plan sponsor can never offload this responsibility to another party. You must be convinced that your provider is qualified to perform a fiduciary role. You must document your selection process, as well as document a continual monitoring of this service provider. Otherwise, if your provider does make a fiduciary breach you can find yourself with something you were trying to avoid: the liability for a breach.
Plan administrators versus third-party administrators (TPAs)
It is a common misperception that third-party administrators (“TPAs”) are plan fiduciaries. TPAs provide a valuable service by performing delegated ministerial administrative responsibilities on behalf of the plan sponsor. Consequently, third-party administrators are sometimes erroneously conflated with 3(21)(A)(iii) plan fiduciaries. This is simply not the case.
If your TPA does not sign on in writing that they are performing in a fiduciary capacity, then they have not assumed any fiduciary duty. Odds are that your TPA’s service agreement clearly states that they are NOT a plan fiduciary.
What about plan recordkeepers? Are they fiduciaries?
Plan recordkeepers are not fiduciaries when they are performing only ministerial tasks such as keeping track of whose money is whose, calculating benefits, and drafting participant disclosures. Like any service provider, they will only become a fiduciary if you specifically hire them as such. But like the TPA service agreement, your recordkeeper’s agreement most likely states they are performing no fiduciary role.
Up next: the 3(21) fiduciary
We hope this blog on the 3(16) fiduciary has been informative. In our next piece, we will discuss the scope of 3(21) fiduciary services, which relate to the plan Trustee’s responsibility for investment selection and monitoring. Our last blog will be a related Trustee piece covering 3(38).