With every positive development in the retirement services industry, there is always going to be a few jokers who will take advantage of the situation to the detriment of the plan sponsors clients they are supposed to help.
Concern about fiduciary responsibility have led to certain providers in offering 401(k) fiduciary warranties where they don’t serve as fiduciaries nor do they warranty against anything you are likely to get sued on.
The proliferation of financial advisors serving as ERISA 3(21) fiduciaries and ERISA 3(38) investment managers have ked to many inexperienced or high priced providers in the space who take out a chunk of their responsibility and liability in their provider contracts. I had heard of an ERISA 3(38) investment manager calling them a limited scope 3(38) fiduciary that makes absolutely no sense when an ERISA 3(38) investment manager has discretionary control and by the nature of that control, must bear the responsibility and liability that goes with it.
The same can be said with ERISA 3(16) administrators. There are a few third party administrators (TPA) willing to offer that service and several TPAs who don’t see the value of that service. The value of the service like anything in this business is all about reasonableness, are the fees reasonable for the services provided. Someone remarked about an ERISA 3(16) administrator charging 45 basis points for their services. That’s a lot of money for something that doesn’t seem worth it. There is no reason an ERISA 3(16) administrator should make more than a TPA or more than what most ERISA 3(38) investment managers charge. I understand that there is liability that goes with be a 3(16), but the TPA and the investment manager do the bulk of the work and the purpose of a 3(16) is to assume the plan sponsor’s monitoring of these providers. Should the guard at the bank make more money that the bank manager? No, nor should the retirement plan guard (the 3(16)) make more than the folks who do the bulk of the work.
Since there are many TPAs not willing to offer the 3(16) service because they don’t see the value or the profit margin, a couple of my friends that I worked with in the TPA space a few years back and myself are considering developing an ERISA 3(16) service that does absolutely no TPA work or any investment advisory work. The 3(16) service would be a standalone service that these TPAs who want no part of the 3(16) business can refer plan sponsors to, so they can maintain a competitive balance by recommending a 3(16) service totally independent from their role as TPA. Fees will probably be a few basis points (less than 10) or a per head charge (depending on the plan sponsor’s needs). Any interest, you know where to reach me.
As with any retirement plan service, a plan provider needs to find the good ones from the bad ones. It’s often difficult, but diligence in their fiduciary duty will let the plan sponsor make the right choice.