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Is Outsourcing 3(16) Duties the Wave of the Future?

Is the move toward using a 3(16) fiduciary inevitable? According to the folks at Fiduciary Plan Governance, the answer is yes. But what does it mean to plan advisors, and should they be adopting the model?

ERISA 3(21) and 3(38) fiduciaries make investment recommendations, with the latter “enjoying” full discretion, while 3(16) relates to administrative duties, including annual filings and the hiring and firing of service providers. A plan sponsor can outsource these duties, but it still has the responsibility to prudently select and monitor the group they hire. (For a deeper dive, see this Plan Consultant cover story by Marcia Wagner.)

It seems like a no-brainer for a plan sponsor to want to outsource much of the work involved in managing its plan, as well as the ensuing fiduciary obligations, to a credible and reliable third party. That’s why MEPs grew so quickly.

But given the DOL’s concern about potential fraud and abuse in unaffiliated MEPs (voiced recently by EBSA head Phyllis Borzi), will more plans turn to 3(16) providers — and should plan advisors recommend them? As with 3(38) duties, few plan advisors are willing or able to take on the administrative duties under 3(16), so some are turning to providers, including some record keepers like The Standard and Transamerica, that offer the service.

Advisors should take care when selecting a 3(16) provider to ensure that they have the resources to fulfill the duties as well as monitor the services. One caveat: Be very clear on whether the outsourced 3(16) provider is performing all or some of the responsibilities — in other words, not just filing paperwork as some have been known to do.

Do you think that more plans will hire a 3(16) fiduciary? Do you use one? If so, what are your experiences? Please comment.

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