A recent advisor survey found a growing awareness – and interest – in embracing 3(16) fiduciary services. What about NAPA Net readers?
That survey was conducted by Pentegra and it found that, 84% of retirement plan advisor respondents said they are considering recommending 3(16) administrative services. It found that more than 34% of advisors believe their clients are receptive to 3(16) services, while another 56% believe their clients are somewhat receptive.
Among this week’s respondents, 48% currently offered a 3(16) product, while the rest did not.
But as for a shift in the market, we also asked readers if they are seeing more of these offerings in the market now than a year ago – and a solid majority, 61%, said they had. Another quarter (26%) said that while they had seen more, it wasn’t exactly a lot. One in ten hadn’t seen an increase, and the remainder noted that they weren’t sure. “I see a lot more people trying various subsets of ‘fiduciary lite,’” one reader commented.
More or Less?
As for whether plan sponsors understood the difference between 3(16) fiduciary services and traditional fiduciary support, there was quite a variety of opinions:
32% - Yes, but only because I've explained it.
26% - Mostly not.
13% - No.
10% - Yes.
The rest were in a “not sure” category. “Mostly no because ‘you don't know what you don't know,’” one reader said. “The clients that started with us only know the high level of service we provide and those clients we acquire, for the most part, don't understand the difference in value/support until they have worked with us for a few years.”
Another saw plan sponsors as “Becoming more educated, need to read the service agreement better.”
“They perceive a difference, but not accurately,” noted another. “The market hasn't settled on the language yet.”
As for those who were offering 3(16) services, we asked if plan sponsor clients/prospects were receptive to the concept. Of those:
35% - Yes, very receptive and even enthusiastic about the idea.
26% - It depends – some are, most aren't, however.
20% - Receptive to the idea, the take-up not so much.
“We tell them it comes with our level of service we provide,” explained one reader. “They aren't paying for the Walmart experience (which is mainly why they are talking to us in the first place. They tried the cheap route and it didn't work out so well).”
“Plan sponsors are receptive to the thought of outsourcing their fiduciary risks and responsibilities,” noted another. “However, there is so much confusion in what 3(16) ‘fiduciary services’ really means. What they want is an independent fiduciary who will serve as the Plan Administrator. In reality, what they get is a fiduciary that is only taking a few administrative tasks off of them. This is the risk for most advisers who do not even know the difference in a Plan Administrator/Named Fiduciary vs. 3(16) services.”
“Conversations differ by market size,” observed another. “The larger the plan/sponsor, the more it makes sense.” Another reader echoed that comment, explaining: “Interest varies with size and complexity of the Plan(s), and the people in charge of the Plan at the employer.”
Lack of Reception?
As for why the plan sponsors who weren’t receptive… weren’t receptive (more than one answer was allowed):
48% - Cost
41% - Don’t think it’s necessary
22% - Think they already have that level of fiduciary protection
18% - Loss of control of certain plan features
One reader noted that there was “confusion around who does what especially if it’s a provider other than the record keeper.”
“More often, they do not fully understand administrative and operational compliance responsibilities,” noted another. “The wrong assumption is that the adviser takes care of everything they need. And this perception is often the result of the adviser mis-marketing their services, use of fiduciary checklists, etc.”
“They are large plan sponsors that feel that such services are more appropriate for small plans that lack the dedicated plan sponsor resources to administer the plan,” noted another.
One reader attributed it to a “Lack of knowledge of what their responsibility is today, a lot still think the RK or TPA, have it all,” while another noted that “because other trusted advisors in the mix don't understand it, snap judgements are made.”
“Most of our start up, micro and small market plans looking for tax deduction and wealth accumulation are already paying for Plan Design and opportunity efficiency – they do not want to pay for additional services and struggle with decision fatigue in meetings,” explained another.
And, as is usually the case, we got a number of reader comments. Here’s a sampling:
“We have several plans utilizing 3(16) services and have had issue with some of the TPA firms who actually do the plan administration services. Be careful to know the capabilities of the team hired to complete administration required to be a 3(16) for your plans.”
“Most plan sponsors think they’re already getting them! Additionally, many companies say they provide the services but their contracts say they won’t take the liability.”
“People misunderstand the difference between authorized to provide 3(16) services and being an official, legal 3(16) fiduciary on the plan. Our older clients appreciate the fact that we let them run their business and we have the expertise to deal with all things 401(k) related. Younger clients still want to be involved, that is until they realize it's not worth their time nor do they have any idea what they are talking about.”
“I think it's important to distinguish the differences between merely providing services that are 3(16)ish but do not come with fiduciary backing. It’s also important to explore the coverage behind 3(16) services because some have dollar caps on coverage (like ‘we are only responsible for penalties up to $100,000’ or other such limitations). Done right, 3(16) services can be a HUGE benefit to employers of all sizes.”
“The real issue we still face, which allows the mis-marketing of 3(16) services, is many in our industry do not understand the fiduciary roles in ERISA nor do they understand the responsibilities attached to those roles. Why? The industry has primarily talked about fiduciary for years but only in the scope of investment fiduciary. This is the root issue, which spills over into the fiduciary outsourcing world. TPAs, who usually prepare the distribution documents and year end notices, have figured out that if they call something a fiduciary act, then they can charge an additional 2,000 to 4,000 or more per year – with very little risk since they were already responsible for it.”
“I think that such services still suffer (unfairly, IMO) a bit from the whole Matthew Hutcheson debacle (the infamous 3(16) fiduciary who was imprisoned for stealing from his client plans). That’s a bit of a shame, since I believe that a lot more small business would sponsor retirement plans if they were confident in 3(16) services.”
“While we have seen TPAs ‘offer’ 3(16) services, they are all over the map. As you know, a firm can offer to provide 3(16) services and limit what services they do provide and put caveats on those and still call themselves 3(16) service providers. The marketplace of 316) service providers is not equal across the board. If this does not confuse the customer it certainly is misleading. As a result, surveys like this are confusing and misleading since one party who offers ‘some’ 3(16) services is answering the same as one who offers a different, but some other set of 3(16) services. You need to itemize the services you want to include and to what extent, i.e., are there limitations (fiduciary or otherwise) on those services.”
“They really do not understand the purpose of 3(16) services. Even after a great deal of explanation some feel they are still on the hook. We brought in an ERISA lawyer to address this issue at a meeting with clients. Almost all felt that we (they) were already doing what was necessary to protect the plan sponsor and the Trustees to the plan. One person, CFO of long term client stated that he thought the IPS and IC were responsible and were doing a great job – wanted to know why we would even be recommending they consider paying more when the expenses of the plan to include ours were enough.”
“Micro to Small market distribution partners have a hard time with the notion that the embedded 3(16) may have to question, challenge, terminate their services or their customer may be challenged by the notion of having an important employee wanting to ‘administratively’ terminate their employment when they are denied a benefit by the 3(16). Things get ‘real’ really fast. From a policy perspective there is a lot of human ‘elasticity’ in the system that supports plan retention. Widespread adoption of 3(16) will cause more plan terminations than expansion of coverage – in the micro to small market. There may be an extra chapter in there where enforcement authorities take out ‘fake it until you make it’ providers. I love the idea of an effective 3(16) framework but the industry simply isn't ready. I’d rather see the industry improve the coverage metric first.”
“For the most part, by providing the services we provide as a local TPA, we significantly reduce any liability that our plan sponsors have, and with no additional cost. We see very little benefit to the plan sponsor for the cost they pay for 3(16) services, if they are already engaged with a local TPA and a competent record keeper.”
“When I see these services advertised, I feel like there’s a bit of false advertising. A plan sponsor cannot fully outsource fiduciary duties; they still have a duty to monitor the 3(16) service provider. However, when I see these services advertised or discussed, they are often billed (even if only by implication) as totally outsourcing fiduciary responsibility. This is legally incorrect and misleading. It ends up taking some plan sponsors from a passive misunderstanding (‘I thought I already outsourced this to my recordkeeper, even though no one told me that’) to being actively misled.”
“Even with 3(16)s, there are different levels of service and fiduciary responsibility. This can make it even more confusing for plan sponsors.”
“There is such a wide range of ‘fiduciary’ services, most of the message gets garbled in the market. However, once a plan sponsor gets a 'full' 3(16) and starts to enjoy the benefits, there is no going back. The labor cost at the employer and at the Recordkeeper is so dramatically diminished by the prevention of errors that a Plan Sponsor is unlikely to take back those functions.”
“Unfortunately TPA services are still viewed as a commodity and many advisors don't fully understand the important role of a strong TPA (especially when serving in the fiduciary capacity as a 3(16)). The TPA industry needs the advisor community to embrace this additional layer of protection (and understand the increased costs to provide additional services). Instead of wanting to appear as the quarterback of the relationship, advisors need to work together with TPAs to help plan sponsors understand the role of a TPA and the differences when serving as 3(16). Only when a true partnership exists in communication will the plan sponsors expectations be met by both parties.”
“Some prospects are comfortable enough hiring our firm since we offer 3(16) services even if they choose to forgo the option.”
Thanks to everyone who participated in this – and every – week’s NAPA Net Reader Poll!