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  • Writer's pictureSamantha Diggs

Is 3(16) Right For Your Clients' Retirement Plan?

Updated: Mar 11, 2022

In the sea of sameness, 401(k) Recordkeepers, TPAs, and Advisors are all looking for a marketing edge. There is always something new to talk about, 3(21), 3(38), MEPs, PPA, Secure Act, Cares Act, Restatements, PEPs, the list goes on and on. One of the newer items that is becoming a topic of discussion is a 3(16) fiduciary. The marketing spin is that if you hire a 3(16) fiduciary as the administrator of your retirement plan then you have transferred the responsibility for the administration of the plan to a third party and relieved the Plan Sponsor of their fiduciary duties. Sound familiar? In our excitement to sell these services and potentially over-promise, perhaps we should look at this a little closer.

Providing complete and full 3(16) administrative services according to the code would mean that a firm such as RPCSI would be completely in charge of the 401(k) plan for the benefit of the employees. It would be our job to oversee all aspects of the plan. Think about that for a minute. Not only are we taking care of normal administrative duties, but we are also charged with making sure the advisor is doing his job, charging a fair fee, and hiring and firing him based on our evaluation. Recordkeepers would be evaluated by a full 3(16) as to their fees, timeliness of services, fund performances, expenses, and if there was anything else better for the employees.

If the Plan Sponsor did not follow the document and rules properly and did not address issues, it would be the 3(16)'s duties to alert the IRS or DOL. Can you imagine? As a TPA we have always viewed ourselves as partners to assist all parties, not be the heavy-handed fiduciary of a retirement plan.

So here is where things start getting a little foggy on 3(16) services. How does a service provider/TPA help a Plan Sponsor by being named a 3(16) fiduciary, while also being a good partner? The way most TPAs are doing this is by limiting which services they provide under 3(16) vs. under their TPA services contract. What is interesting is that for years, good TPAs (like RPCSI), have provided many of those 3(16) services as part of their basic services. Recently, we were in a competitive situation and I had the opportunity to see what other providers were offering in their 3(16) service model. On this 500 participant plan, the additional 3(16) services cost anywhere from $10,000 on up to $30,000. (The cheaper the service, the fewer features were offered). What was interesting was, that when I started checking off services that RPCSI normally does in our typical service model, there were very few items being offered for this extra service except for signing the 5500 and payroll services, both of which we can do as an add-on feature for a lot less than $30,000.

This leads us to the last issue. Does having a 3(16) offload the administrative fiduciary responsibilities entirely? I don't believe so. As you have heard before in other circumstances, at the end of the day, the Plan Sponsor is ultimately responsible for the retirement plan. They have a responsibility in choosing the 3(16) administrator. But let's take this one step further. It is true, RPCSI will take 3(16) fiduciary liability for the services we are contracted to do. But what if the Plan Sponsor doesn't give us the information we need or doesn't follow through with our direction and we can't perform our services? Isn't the Plan Sponsor now at fault and liable as a fiduciary of the plan? Are we not back to being partners like we were in the first place under a normal third-party administrator agreement? Compare hat to our normal service model. Although we are not named as 3(16), if we did not perform services that we were contracted to do and through no fault of the Plan Sponsor these services did not get done, we would remedy the situation and make it right as part of protecting our reputation. That is only good business.

But let’s make this a worst-case scenario and say that an administrative mistake is made 3 years down the road without RPCSI being the 3(16) and it costs $15,000 for the employer to correct the mistake and the employer has to pay this. Having not paid for 3(16) services for 3 years ($30,000 X 3 = $90,000) the employer is $75,000 ahead in fees even paying for an expensive mistake.

The conclusion in my opinion (and this is only my opinion) is that 3(16) is not going to relieve an employer completely of fiduciary responsibility, duties, or liabilities. It is costly, and as expenses are a big issue in plan operation, an employer needs to understand cost vs. value. Lastly, if an employer needs help to operate a plan properly, there are numerous ways to help, including 3(16) fiduciary services, and it would be wise to explore all avenues.

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