The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.
A recent call with a financial advisor in the Southeast/Mid-Atlantic region is representative of a common inquiry regarding a plan sponsor’s unease with handling certain plan administrative functions. The advisor asked:
“One of my plan sponsor clients is uncomfortable having the full responsibility (and liability) for performing all of the fiduciary functions of a plan administrator. What, if any, options are available to help alleviate the plan sponsor’s concerns and lessen the fiduciary burden?”
Highlights of Discussion
- Your client may want to consider hiring a firm that specializes in providing “3(16)” administration services. ERISA defines the term “plan administrator” under Section 3(16) as either the person or entity specifically so designated under the terms of the plan, or the plan sponsor if none other is designated. A 3(16) administrator is a fiduciary of the plan who is responsible for ensuring the plan is operated in compliance with the rules of ERISA.
- A plan sponsor, who is the plan administrator, may choose to outsource some of the operational functions of a 3(16) fiduciary to another entity. For example, some TPAs are willing to offer more than record keeping services, and take on fiduciary responsibility and liability for certain plan management obligations as an ERISA 3(16) fiduciary. Trust companies and certain registered investment advisors (RIAs) may also offer 3(16) administration services.
- By engaging a 3(16) plan administrator, the plan sponsor shifts fiduciary responsibility to the 3(16) plan administrator for the services specifically contracted (e.g., plan reporting, participant disclosures, distribution authorization, plan testing, etc.).
- It is important to note that a plan sponsor may never fully eliminate its fiduciary oversight responsibilities for the plan, and remains “on the hook” for the prudent selection and monitoring of the 3(16) plan administrator.
- Should a plan sponsor decide to engage a 3(16) fiduciary administrator, the selection process must be carried out in a prudent manner and solely in the interest of the plan participants. The Department of Labor (DOL) requires the plan sponsor to engage in an objective process designed to elicit the information necessary to evaluate the following three criteria:
- qualifications of the service provider;
- quality of services provided; and
- reasonableness of the provider’s fees in light of the services provided (See DOL Advisory Opinion 2002-08A and DOL Field Assistance Bulletin 2002-3.)
Conclusion
A plan sponsor can “outsource” some of its plan administration obligations under ERISA to an outside entity that is willing to assume the responsibilities of an ERISA 3(16) fiduciary of the plan. It is not a decision to be made lightly, as the DOL mandates the plan sponsor follow a prudent selection process that looks out for the best interest of the plan participants.
