3(16) Administrator & Fiduciary Services: The Ultimate Guide


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Retirement services are constantly changing. 3(16) fiduciary services (or 3(16) plan administrators) is a complex and ever-changing space. It is one of the fastest-growing segments in the retirement arena

What is a 3(16) fiduciary or administrator? What activities do they perform? Why would a company be interested in their services?

In this post, were going to take a look at what a 3(16) administrator does and answer these fundamental questions.

The evolution of 3(16) Administrators

First, a little background. Retirement plan administration can carry numerous burdens and headaches. Let’s say you are a financial advisor, and you are constantly educating your clients on retirement planning and the options they have available.  

We know that retirement plans come in all shapes and sizes. There are solo 401k plans up to more complex cash balance plans and defined benefit plans. Each plan has pros and cons, along with tax and funding considerations.

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But now that a client is ready to sign up, you mention the administration tasks and all the rules and requirements. Sure, a traditional third-party administrator can help with some functions, but the client bears many plan administration headaches. 

Clients have businesses to run and are not experts in retirement plan administration. In most situations, they don’t want the burden even though they see the benefit. 

Ensure that plans are in compliance and that the company is not getting hit with IRS penalties and fees assessed by the Department of Labor (DOL). These problems will take them away from running their business. 

In this situation, a 3(16) administrator can come to the rescue. If a client is overwhelmed with the plan administration, the 3(16) service provider can take care of all the headaches. 

What exactly does a 3(16) administrator do?

Let’s discuss the specific services provided by an administrator.

The DOL holds business owners responsible for all aspects of retirement plan compliance. The DOL expects them to have an adequate background and understanding of the policies and procedures that must be following to assure plan compliance. 

But the reality is that most business owners don’t get it. The good news is that the DOL allows them to outsource and hire experts (or fiduciaries) to act on the company’s behalf.

As a general rule, there are different types of fiduciaries. A 3(38) fiduciary or 3(21) fiduciary involve the plan investments. But the 3(16) fiduciary will handle the day-to-day responsibilities and operations of the plan. 

Thanks to the Employee Retirement Income Security Act of 1974 (ERISA), a 3(16) plan administrator can step in and take responsibility for the plan’s administrative tasks. 

What are the responsibilities and tasks of the 3(16) plan administrator? 

At first glance, business owners don’t often realize how many tasks are required. They sometimes assume the TPA is handling everything. It is correct that the TPA will usually handle the Form 5500 filings and complete all non-discrimination testing. 

But we often forget about all the daily tasks like notifying employees of plan options, distributing compliance paperwork, and coordinating with investment advisors. Fortunately, the company can outsource this work to the 3(16) fiduciary.

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Companies and financial advisors may notice that not all 3(16) administrators perform the same duties. Each provider can have a variety of services. 

Some might only sign Form 5500 and send out required employee notices. Others might perform employee onboarding and other services that are likely an extension of the company’s HR department. 

A 3(16) administrator’s typical role is quite different from the average (TPA). A TPA will not have any fiduciary liability or responsibility. Also, the TPA is not responsible for the tasks customarily provided by the HR department of the company. 

A 3(16) administrator can be hired to perform minimal services are may find themselves acting in the capacity of the plan sponsor. This includes assuming fiduciary liability and undertaking all items that the company would typically handle. 

Let’s take a closer look at some of those tasks that a 3(16) plan administrator handles.

Examining the administrative tasks associated with a retirement plan

The administrative work associated with a retirement plan can encompass many things. It would include daily investment or business updates requiring attention to annual notices and plan testing initiatives. Below are some of the tasks:

  • New employee startup. Business owners are required to provide plan summaries, enrollment or onboarding kits, initial notification, and fee disclosures. 
  • Employee changes. The company must approve the 401(k) deferral changes and ensure that the payroll system has been correctly updated and the employee has been provided confirmation.
  • Employee termination. Upon termination, there are many tasks to be performed. Distribution forms must be submitted, withdrawals or rollovers should be approved, eligibility should be communicated to the recordkeeper, and plan correspondence should be maintained.

These are just a few of the action items. But the list can go on and on. 

There are plenty of actions that business owners must address. This includes processing contributions for each payroll run, employee updates to account information, and processing loans or hardship distributions. Let’s not forget the extensive list of annual requirements for plan maintenance.

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So what’s the solution? A 3(16) administrator you trust can handle these daily tasks and assume the fiduciary obligation associated with the plan. A 3(16) administrator can step right into the business owner’s shoes and address the required items. The business owner is now able to focus on running their business.

Why is payroll the biggest retirement plan headache? 

The work performed by a 3(16) administrator is critical because they are responsible for the compliance activities. The goal is to maintain the plan so that it is free from errors. 

What is the biggest stumbling block? It’s usually the company’s payroll data. It is submitted to the recordkeeper and drives the plan activities. Business owners often assume that recordkeepers are checking these files and making sure information is complete. But this is often not the case. The responsibility for accuracy falls with the company. 

chart with finance, tax and debt

Payroll data includes a range of information, including hire dates, birth dates, social security numbers, and other sensitive information. 

It is commonplace to have basic errors in the payroll files that will get submitted to the recordkeeper. These can result in costly mistakes and time-consuming corrections.

Common payroll errors

If you are unaware of how payroll data gets off track, we understand. Let’s examine some of the more common errors:

  • Duplicate payroll files. Payroll files are often submitted twice. Many systems will catch these duplicate submissions and correct the files.
  • Social security errors. We have seen SSNs get transposed and added to the wrong payroll record. 
  • Incorrect or missing dates. Payroll files are often submitted with missing or incorrect dates, such as hire date, termination date, or birth date. Inaccurate dates can result in incorrect vesting schedules, eligibility errors and could even result in faulty distributions.

The above errors represent just a few of the more common payroll errors. But the results are clear. Payroll errors create problems with plan compliance and be a nuisance to your employees. 

Bottom line

Business owners are expected to understand how their plan works and manage all of their retirement plan activities. At the same time, owners are experts in their fields. But retirement administration is usually not something they have much interest or expertise in. 

Companies and financial advisors need to understand when 3(16) administrators can be a great option. This will give the client peace of mind and ensure that the plan is effectively being administered. This keeps the plan free from errors, risk, and IRS penalties.

Paul Sundin

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