3(16) Plan Administration: The Next Big Thing?

What is often heralded as the next big thing often turns out to be a dud. I’m still waiting for Tim Leary to be the next Tom Seaver for my New York Mets.

Well for many in the retirement plan business, the next big thing may be ERISA §3(16) fiduciary services, where someone (probably a third party administrator (TPA) or an affiliate) assumes the responsibility of administrator from the plan sponsor.

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 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.

So this is a great space for TPAs to be in just like §3(38) fiduciary services are a great space for registered investment advisors because it’s just a notch (but a lot more liability) than what they are currently doing.

Again, it’s not a right fit for every TPA and not the right fit for every plan sponsor client (especially those that handle their role as plan sponsor well).

Is it the next big thing? I think it’s a great business because a year later, open multiple employer plans are pretty much dead and more plan sponsors want the opportunity to delegate some or most of their duties as plan fiduciary.

§3(16) administration is just another form of what is getting to be known as “401(k) outsourcing”.

I think it’s a growth spot for TPAs, especially for everyone who feels that fee disclosure is putting the squeeze on fees and profit margins

My good friends at DALBAR offers certification of those that want to be §3(16) administrators, I’m sure CEFEX probably does as well.

If you are a TPA interested in offering a §3(16) service, feel free to call (agreements for the service are at a flat fee). Even if you are not interested in offering yourself, but interested in partnering up with a non-TPA who offers it, give me a call as well.  Sorry for the cheap plugs.

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