What Are 3(16) Fiduciary Services and Do You Need Them For Your Retirement Plan?
The interest in 3(16) Fiduciary Services is not slowing down. Yet, these services may not be the best option for every retirement plan. Not all 3(16) fiduciaries offer the same services, and not every plan sponsor needs the same assistance with administrative duties. We want to help you evaluate if 3(16) services are right for you. Let’s look at what these services entail.
What are 3(16) Fiduciary Services?
Every retirement plan must have at least one fiduciary. Often, this is the head of HR, the CFO, or the business owner. As the fiduciary, one is responsible for overseeing the administration of the retirement plan. Whether it's filing government paperwork, maintaining employee communications, or mitigating errors and issues within the plan operations, serving as the fiduciary requires a lot of time and expertise. A 3(16) fiduciary can be hired by the business owner to maintain the daily administrative needs of the retirement plan, alleviating the burden on the Plan Sponsor, and in some cases assuming fiduciary liability for the plan. Although the responsibilities of a 3(16) fiduciary differ from those of a Third Party Administrator (TPA), some TPAs, like RPCSI, offer 3(16) services to perform certain fiduciary functions.
Pros of 3(16) Fiduciary Services:
It will alleviate some of the many responsibilities that burden Plan Sponsors
It will reduce the uncertainty of compliance when under an IRS or DOL audit. Having failures found is time-consuming and costly.
It will provide you with additional shared Fiduciary compliance with RPCSI to mitigate risk.
It will give you the freedom to focus your time and efforts on your business, not your retirement plan.
It will provide outside oversight on the financial advisor and recordkeeper. Full evaluation of the job performance of the recordkeeper and financial advisor by an industry expert will help ensure Plan Sponsors are receiving the best service.
Cons of 3(16) Fiduciary Services:
Administrative fiduciary responsibilities are not offloaded entirely. Ultimately, the Plan Sponsor is responsible for the retirement plan, mainly because they have a responsibility in who they choose as the 3(16).
The Plan Sponsor is still responsible for providing the information necessary for the fiduciary to perform their duties. If the Plan Sponsor fails to provide the information, inhibiting the fiduciary, the fault lies with the Plan Sponsor and not the 3(16) fiduciary.
Fiduciary services are expensive. Many Plan Sponsors are attracted to these services because of the protection against costly administrative mistakes. However, this is a gamble because the cost of the services may far outweigh the cost of a mistake, should the mistake even occur.
Do You Need 3(16) Services For Your Plan?
Just as there is no one-size-fits-all retirement plan, there is no universal solution to the administrative burdens experienced by Plan Sponsors. Whether hiring a 3(16) fiduciary is the right fit for your plan all comes down to evaluating the potential benefits vs cost. Most importantly, hiring a 3(16) fiduciary does not relieve you of all of your administrative duties or responsibilities. With the right fit, these services can alleviate many of the daily burdens, but the ultimate responsibility still rests with the plan sponsor.
There is a significant expense associated with outsourcing these services. For some business owners, that cost is worth the time that is freed up and the professional advice at their fingertips. It is critical to fully understand your contract with the service provider to ensure you understand what you are paying for and receive the full benefits.
Lastly, it may not be necessary to hire yet another service provider to receive some of the benefits. TPAs like RPCSI value a business model in which we come alongside the client to serve as a trusted business partner in which we answer questions, provide guidance, and aim to make the administration of your plan as easy as possible. If you have good service providers already in place, you may be receiving many of the benefits of a 3(16) fiduciary without the added cost. Additionally, some of the tasks that a 3(16) may traditionally provide are available as a fee-for-service line item vs. having a full 3(16) arrangement.
If you have more questions about 3(16) fiduciary services, or how RPCSI delivers value under our normal Third Party Administration agreement, we’d love to hear from you.