3(16) Fiduciary Services: What’s All the Hype About?
3(16) fiduciary services, also referred to as 3(16) plan administrators, are one of the fastest growing sectors of the retirement plan industry today. In this post we’ll answer the following questions: Why do 3(16) fiduciary services exist? What do these plan administrators do? Why are they such an important option to present to plan sponsors?
Setting the scene: The administrative burden of retirement plans
As a financial advisor, you’re constantly selling the value of a retirement plan and the different options available to business owners. You’re explaining the pros and cons of each and how a safe harbor, cash balance, or other type of plan/combination of plans can meet their unique needs and goals.
You show them the numbers – taxes minimized and contributions maximized – and you see excitement in their eyes. They’re on board!
Then you mention the administrative work involved, along with the rules and regulations associated with maintaining the plan…and their eyes slowly start to glaze over. They are not experts in retirement plan administration, and they surely don’t want to be. They’re busy running and growing their business.
Yet, retirement plan tasks and legislation are important, ensuring the plan remains in compliance and the plan sponsor avoids fees and penalties imposed by the Department of Labor (DOL) or IRS. So, what do you do to help your clients?
That’s where a 3(16) fiduciary comes in. You can mention the administrative work and regulations that come along with a retirement plan, and if clients start to look overwhelmed, note that the 3(16) service you recommend takes care of all it, so they don’t need to worry.
To provide background for these conversations, let’s talk about why 3(16) fiduciary services exist and what they cover.
Why does a 3(16) fiduciary service exist?
The DOL holds plan sponsors (business owners) responsible for all aspects of their retirement plans, expecting them to be well-versed in compliance. As most business owners are typically not, the DOL allows them to hire experts, or fiduciaries, to act on their behalf.
Generally speaking, two types of fiduciaries – 3(38) and 3(21) – involve investments, while another – 3(16) – involves the daily operations and administration of the plan. Under the Employee Retirement Income Security Act of 1974 (ERISA), the 3(16) plan administrator —also known as the fiduciary — takes responsibility for the daily administrative tasks associated with the plan.
But what does that even mean? What is the role of the 3(16) plan administrator? Let’s dig a little deeper.
A boatload of retirement work
Even if you discuss it with them, business owners may not realize how many tasks are required of them when they offer a retirement plan, but there are many. A good 3(16) fiduciary can manage this administrative work for plan sponsors.
However, it seems no 3(16) does the same thing. Each provider has a different checklist of the items they complete (here’s ours). Some may just sign the Form 5500 and send notices. Others may complete almost all the administrative tasks associated with the plan.
The role of a 3(16) plan administrator is quite different than that of a third-party administrator (TPA). TPAs do not take fiduciary liability. Also, they are not responsible for the tasks required of a 3(16) plan administrator. The highest level of 3(16) plan administration occurs when the service provider acts as the plan sponsor, taking on the fiduciary liability and all the action items the plan sponsor would typically be responsible for when administering the plan.
Let’s look a bit closer at what tasks are required of the plan sponsor and how having a 3(16) plan administrator can provide value to your clients.
What exactly is the administrative work associated with a retirement plan?
The administrative work associated with a retirement plan includes anything from the daily business updates that require action to yearly notice and testing requirements. Below are just a few examples of business activities and the tasks associated with them.
- A new employee starts. Plan sponsors are responsible for providing plan documentation, sending the enrollment kit, providing the initial notices and fee disclosures, and setting up the employee with the recordkeeper.
- An employee changes their deferral rate. The plan sponsor must approve the deferral change and update the payroll system for the employee.
- An employee resigns or is terminated. In this case, distribution paperwork must be sent, any withdrawals must be approved, the plan exit must be initiated and managed, eligibility must be updated with the recordkeeper, and plan communications must be maintained.
And the list goes on. Actions like this must also be taken for numerous other business activities: every payroll run, any time an employee updates their personal information, any time an employee requests a loan or hardship distribution, etc. In addition, there’s also a long list of annual requirements for maintaining the plan.
The solution? A 3(16) fiduciary service provider you know and trust that can take care of the everyday tasks associated with sponsoring a retirement plan. The right 3(16) will step into the plan sponsor’s seat and manage these items, so the plan sponsor can avoid confusion and maintain focus on their business.
What secretly sabotages retirement plans? Payroll data
The quality of the work done by a 3(16) provider is important, since they’re essentially responsible for the plan’s compliance. Their job is to keep the retirement plan free from errors. But how does a fiduciary keep a plan error-free? Where do plan errors come from?
Plan sponsors (or their payroll companies) provide payroll data to the recordkeepers, and this feeds the activities associated with the plan. Plan sponsors may assume that recordkeepers are checking these files or ensuring that no required information is missing, but they are not. It is not their job. It’s the plan sponsor’s job to ensure this data is complete and accurate.
Data integrity issues aren’t often discussed in retirement, so you might think, “Well, surely payroll data errors aren’t common!” You would be wrong.
Payroll data includes birth dates, hire dates, social security numbers, and a plethora of other information. Quite often, there are seemingly simple errors contained in these files that get fed to the recordkeeper and create costly errors for the plan sponsor.
Errors, errors, everywhere!
If a payroll error seems like an unclear concept, we get it. Here are some of the more common payroll error examples we’ve found.
- Duplicate files. On more than one occasion, we’ve seen employers submit the same payroll file twice. Our system flags this duplication and we reach out to retrieve the correct file, preventing incorrect data in the plan.
- SSN manual entry error. One employer recently transposed the SSN of an employee, accidentally creating a “new” employee while also distorting the records of the actual employee. We caught this and fixed it quickly before it became a problem.
- Missing or incorrect dates. Several employers submit payroll files that are missing or have the incorrect date of birth or date of hire. If these are inaccurate, vesting, eligibility, and other important aspects of the participant’s information are also incorrect.
These are just a few common errors, and they can lead to several costly issues in the plan. We’ve built a system that completes over 100 data integrity checks on payroll files, catching and fixing these errors before they become real problems. This robust system of data quality checks keeps clients compliant, avoiding costly fines. Our team finds errors in over 50% of the payroll files they review. That’s how frequently they occur.
Why it matters
As a financial advisor, you make your clients’ lives easier. Our job is to make your life easier by providing the best services to your clients.
Clients are expected to know and manage all of their retirement plan details, and while they are experts in their respective fields, they probably don’t know how to administer a retirement plan. They must know that payroll and retirement are closely connected, the risks associated with errors in payroll data, and the rules and regulations from the IRS and DOL.
Expecting clients to act as a 3(16) plan administrator is a huge ask, and one that just isn’t realistic or feasible. That’s where we come in. You can share with clients exactly why a good 3(16) fiduciary is an important investment. Then, we can step in as the experts, taking on tedious tasks and keeping the plan safe from risk, errors, and penalties.
Interested in more tools and resources about 3(16) services? Fill out this quick form to receive our 3(16) Buyer’s Guide to provide your clients, along with answers to any additional questions you may have.