The 3(16) Boom may cause some trouble

The next big thing in the retirement plan industry is the proliferation of companies offering ERISA §3(16) services. This is a result of the Department of Labor ill-advised Advisory Opinion which destroyed the business model of many “Open” MEPs (multiple employer plans), as well as the advertising 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 “Third Party Administrator” (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.

So obviously, a plan sponsor must be careful to vet any provider they are considering to be a 3(16) administrator.  If you are interested in finding a 3(16) administrator or becoming one, you know where to reach me.

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