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Can Employers Outsource Administrative Fiduciary Responsibility?

Like most complicated question, the answer is yes and no. It is possible for a plan fiduciary to outsource the administrative reporting and disclosure requirements to a third party under ERISA section 3(16) but there are legitimate concerns and caveats. In a thoughtful article by ERISA legal eagle Marcia Wagner in the recent Plan Consultant magazine published by ASPPA, the issues are clearly and thoughtfully explored.

Duties under 3(16) include:

• Providing SPDs (Summary Plan Descriptions) to participants
• Participant fee disclosure
• 5500 form preparation and submission
• Engaging an accountant when needed
• Maintaining tax-qualified status

Failure to comply can result in sanctions and fines. The duties under 3(16) should not be confused with what a TPA performs, which does not carry fiduciary responsibility. So, for example, even though a TPA typically prepares the 5500 form, it is still the responsibility of the fiduciary under 3(16).

If a plan does outsource duties under 3(16), the plan documents need to be amended to include the “named fiduciary” and the plan sponsors ceases to be responsible — except that they are responsible for the selection and monitoring of the named fiduciary as well as monitoring the timely transmission of employee deferrals.

When evaluating the named 3(16) fiduciary, the plan sponsor should take into consideration the outsourcer’s qualifications, service quality and fees.

The plan sponsor should consider whether the fees are reasonable, and may want to consider whether the named fiduciary has the capacity to pay legal fees and fines and whether is has appropriate insurance. Plan sponsors may also elect to outsource their investment responsibility to a 3(38) fiduciary but not to the named 3(16) fiduciary if they have the ability to unilaterally increase fees.

So should plan sponsors outsource 3(16) responsibility? A large percentage of The Standard's sales proposals have requested the service since it was launched. Advisors should be aware of the service as well as the providers offering it, which also includes Transamerica and some smaller firms. Pensionmark, a network or advisors recently announced a 3(16) program in partnership with Transamerica. 3(16) services may gain more traction as the DoL increases its scrutiny of unaffiliated MEPs.

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