How 401k Advisors Can Effectively Offer 3(16) Services

Here's how to properly offer 3(16) services to your 401(k) plan sponsors.Here's how to properly offer 3(16) services to your 401(k) plan sponsors.

Imagine you are fortunate enough to receive a referral for an employer who is struggling with 401(k) administrative issues. The incumbent advisor recommended the employer purchase 3(16) services and “outsource everything” – which sounded good to your prospect. But what exactly does that mean? When it comes to 3(16) services, we are seeing that the language doesn’t always align with the services and, in such circumstances, additional fact finding is desperately needed in order to know just what the client is buying. This is where the knowledgeable retirement plan consultant can truly go to work.

The term 3(16) is a direct reference to the code section within the Employee Retirement Income Security Act of 1974 (ERISA) that specifically designates who will serve as the plan administrator. In the market, this term can represent various shades of the role described above. A 3(16) service is any administrative service that goes beyond standard third party administration (TPA) services. For example, a TPA normally prepares a Form 5500 for signing by the plan administrator. If the TPA takes it to the next logical step and signs it themselves, that’s an example of a 3(16) service. There is a laundry list of additional services that are being touted in the marketplace – the below offers the most common:

  • Signing the Form 5500
  • Signing off on non-discrimination testing
  • Discretion over loans and ordinary distributions
  • Qualification of a Domestic Relations Order (QDRO)
  • Adjudicating a hardship withdrawal
  • Overseeing contribution timeliness
  • Mailing of annual required notices
  • Interpreting plan document provisions

Market demand for these services is strong. Clients often say, “I wear a lot of hats. Anything that takes something off of my plate regarding running the 401(k) plan is something I’m interested in.” There is, however, a question of how these services are understood and marketed by service providers and financial advisors.

In my travels, when discussing fiduciary governance and fiduciary outsourcing, I’m often asked if our firm is a 3(16) and compared to another service provider. The reference to the vendor as a 3(16) is usually incorrect. The vendor is typically a provider of 3(16) services, which spotlights an important distinction. Section 3 of ERISA clearly defines these terms and item 16 specifically defines the Plan Administrator. As such, this role is a Named Plan Fiduciary – named in the plan document as being responsible for administering the plan in accordance with the governing plan document and the ERISA. The 3(16) named fiduciary is also the entity in charge of impartially evaluating and replacing, when necessary, all service providers who assist the plan with its daily ongoing operation.

It is easy to understand why clients are perplexed by the various fiduciary services and what those include. The retirement industry has largely confused the issue for clients as they race to offer services under the banner of the 3(16) fiduciary role, but without detailing whether their services step beyond ministerial functions and into the realm of fiduciary.

To confuse matters further, there are those in the industry who do sign on as a “true” 3(16) fiduciary. They are less common, but they do exist. Any plan sponsor who simply wants as much off of their plate as possible (regarding running their plan) will struggle to understand any of these fiduciary service iterations. This reality presents a significant consulting opportunity for the skilled retirement plan advisor to provide clarity and understanding in a confusing marketplace.

Ultimately, what matters the most regarding running retirement plans (outside of participant outcomes) is ensuring that the plan runs smoothly and that the plan follows the plan document and stays in compliance with the ERISA. The easiest way to ensure that this happens is to consult with the client and find out what parts of running their plan are the most painful for them – the parts that they’ve erred on in the past or that they find stressful in doing today.  These pain points are often ideal for outsourcing to a 3(16) services provider.

This type of consulting will be increasingly important in the coming months and years as more and more of the providers out there switch to institutionally-priced investments, low-cost index funds and ETFs. Once that happens, professional retirement consulting will need to be more about tangible, practical services that make clients’ lives easier and provide solutions that are proven to improve financial results for participants.

Jason Grantz, QPA, AIFA, is Managing Sales Director, Eastern U.S., at Unified Trust Company, a national fiduciary located in Lexington, Kentucky.

1 Comment on "How 401k Advisors Can Effectively Offer 3(16) Services"

  1. Paul J. Smith, AIF - SVP Starkweather & Shepley | August 7, 2017 at 5:33 am | Reply

    Great post. This is clearly an area where the industry needs more training. I am constantly having to help folks sort out the differences in service levels, and how they square with their own levels of Fiduciary liability / exposure. In particular, how they relate to insurance and bonding requirements for the Professional Services being offered.
    Often the practitioner underestimates the E&O / D&O exposure they are taking on, and fails to see how ERISA’s Section 412 Bonding requirements may need addressing. These can be complex matters that should be handled by an insurance and bonding team with a strong ERISA background.
    Often there will be Professional Liability insurance (E&O) in place – but does it extend to acting with 3(16) Fiduciary status? And is the bonding done to meet the strict requirements of Section 412? This is a critical discussion, as services are being expanded.
    Paul J. Smith
    Starkweather & Shepley Insurance Financial Institutions Group

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