“John started his business with a few dollars and an idea. John’s idea, and hard work, paid off; in no time his business was growing like crazy. John found himself spending more and more time overseeing employee hiring; more and more time overseeing the purchase of new equipment; more and more time overseeing an ever-increasing number of outside suppliers. John mostly wanted to concentrate on his “idea.” He really didn’t like overseeing all that other stuff common in any growing business. So …what would John do to relieve himself of all these day-to-day distractions? He would hire a CEO, of course.”
So, what about John’s 401k Plan? As a company owner, ERISA says that he is legally, and personally, liable for making “prudent” decisions about every aspect of his plan. John is responsible for reading, and understanding, every one of the plan’s legal documents, its investment line-up, it’s discrimination testing, and finally, signing the plan’s IRS 5500 Form under “penalties of perjury.”
John’s oversight responsibilities are not singular, but continuous. John has a TPA, an investment advisor, a daily recordkeeper, and maybe even an outside ERISA attorney; they all advise John.
Some may even be a fiduciary. But even if they are, John must understand the reports they produce, the disclosures they give his employees, and determine whether everyone’s fees are “reasonable” under the law. John is still the “named fiduciary (NP),” the buck-stops-here guy.
If you were John, a successful entrepreneur, would you want to retain these legal responsibilities? Would you feel qualified to perform this oversight prudently? In my many years of experience, I have yet to find ANY employer who feels they can meet ERISA’s highest standards requirements.
As a result, just like the situation in which John figured it was best to outsource his company’s day-to-day responsibilities to a CEO, John should seriously consider outsourcing his named fiduciary liabilities relative to his plan.
When I started my TPA firm many years ago, we did everything inhouse. We did our own payroll, our own HR, and all our own printing. Nowadays, technology allows firms to seamlessly outsource these and many other services. Generally, outsourcing saves us headaches and often saves us money.
ERISA, a law passed in 1974, has always allowed employers/plan sponsors to outsource almost all their fiduciary risk. Further, in the 45 years since ERISA, fiduciary responsibilities placed upon employers/plan sponsors have increased geometrically.
But with the passage of the SECURE Act in 2019, Congress has now officially codified this outsourcing practice. New rules will soon allow 402 named fiduciary and 3(16) “plan administrator” firms to be certified by the U.S. Treasury Department. This certification will give comfort to employer/plan sponsors as they discharge their responsibility in hiring outside vendors since said hiring is a fiduciary act.
“When I was a teenager, I worked in a gas station. I did oil changes, radiator flushes, and minor tune-ups. I remember one long-term customer. He came in and told us he was going on a long trip. Per his request, we changed his oil and spark plugs. One hundred miles into his vacation his engine overheated due to a stuck thermostat. When he got back in town he came in and complained—was he mad. He could not understand why we had not checked his thermostat. Of course, we explained that our task was to change the oil and replace his spark plugs. We were not tasked with checking the entire engine, nor were we paid to do so. In other words, the customer thought he was getting comprehensive oversight responsibilities. We did not offer that service; nor did he pay for it.”
In recent years, plan sponsors have shown increased interest in outsourcing their fiduciary risk. We now hear about 3(21), 3(38) and 3(16) fiduciary vendors. All these fiduciaries can be useful. Whether a written fiduciary contract, or an oral agreement to work on your car, the buyer needs to understand not only what the vendor WILL do, but almost more importantly, what the vendor will NOT.
So, let’s look at the services these three fiduciary vendors typically provide:
3(38)
- What they do: Take on all fiduciary responsibility for determining the plan’s mutual fund line-up. This fiduciary DOES take some fiduciary risk off the NF’s shoulders.
- What they do NOT do: They do not take on NF responsibilities.
3(21)
- What they do: Advise or recommend to the NF the plan’s mutual fund line-up, as a co-fiduciary.
- What they do NOT do: Take any fiduciary risk off the NF’s shoulders. Their agreement will clearly state that the final say on investments belongs to the NF, NOT the 3(21). They do not take on NF responsibilities.
3(16)
- What they do: Take on “some” (varies greatly) of the plan’s administrative duties, and the fiduciary responsibility for such accepted tasks;
- What they do NOT do: Establish, moderate, and document every plan administration committee, as well as provide management oversight in ALL plan areas, not just the administrative piece. With very few exceptions, they do not take on NF responsibilities.
Back to John. Say he hires a 3(21), a 3(38), a 3(16) …or all three. Is he in a better spot than where he was before he hired them? Absolutely! But how much better?
Just like my old gas station customer, he was clearly better off with an oil change and new spark plugs, but he assumed certain things; and we were probably not clear enough in telling him what we were NOT doing.
We find many instances where an employer/plan sponsor has hired a fiduciary, typically a 3(21) or 3(16). Once hired, the plan sponsor breathes a sigh of relief and thinks, “Now I really have this fiduciary thing covered!”
Unfortunately, more times than not, people like John do not have the expertise to read and understand the contract(s); which means many fiduciary gaps probably still remain—and John is unaware.
Even if we assume a best-case scenario, it is very likely none of these vendors have replaced John as the NF. John is still legally and personally liable for overseeing all fiduciary and non-fiduciary vendors—helpful, but not ideal.
So, what is ideal?
Wouldn’t it be nice if John could find a fiduciary who is willing to legally take on, in writing, all the fiduciary responsibilities allowed under the law? Not just taking over certain tasks, but the plan’s management oversight also? Well, there is—it is called a “402 named fiduciary.”
Unfortunately, there are so few vendors offering this comprehensive service, most people have never heard of such a service.
A common question is, “How is a 402 different from a 3(16)”, since both deals with a plan’s administrative duties? I can illustrate quite simply:
- 3(16) is an actual section of the ERISA Regulations. It defines the term, “plan administrator (PA).” The PA’s responsibilities are whatever duties specifically accepted by the PA, in writing. Any fiduciary responsibilities or tasks not specifically outsourced to an outside 3(16) remain with the employer/plan sponsor.
- 402(a) is also an actual section of the ERISA Regulations. It requires every qualified plan to have one or more named fiduciaries. If NFs are not specifically named, all respective NF responsibilities default to the employer/plan sponsor. But here’s the kicker—Section 402(a) goes on to say that the NF, “shall have the authority to control and manage (emphasis added) the operation and administration of the plan.” This authority is not mentioned in Section 3(16). Section 402 implies a higher level of oversight of the plan’s operation. Because 402 responsibilities also include administration, most 402 named fiduciaries are ALSO the 3(16) plan administrator.
If John hired a 3(21), a 3(38), 3(16), or all three, that would be analogous to John hiring an HR director, a production manager, and a head of sales. All competent people …but John would STILL be responsible for overseeing these folks daily. This is precisely what John is trying to avoid.
Therefore, he hires a CEO.
John still has a responsibility to oversee the CEO but is no longer responsible for these supervisor’s day-to-day activities. John has less risk, spends less time on company stuff, and more time doing what he really wants to do …growing his business.
A company CEO is usually given the responsibility of reviewing and signing contracts, addressing production bottlenecks that inevitably occur, and giving expert advice to John. John is happier, and his business runs more efficiently. It’s a win-win.
A good 402 does the same thing as the 401k plan CEO. John retains a few basic responsibilities, but he no longer has to read and sign all vendors’ contracts, no longer has to review every vendors fee to ensure reasonableness under the law and no longer has to sign the annual IRS 5500 Series Form under penalties of perjury.
Of course, a CEO, like a 402, would take on many more duties and responsibilities than those described here. But suffice it to say, the average CEO probably has much more expertise in overseeing a company’s day-to-day activities than the typical entrepreneur and the average 402/3(16) fiduciary probably has much more expertise and experience in overseeing 401k rules and administration than the typical entrepreneur.
So, doesn’t the use of a 402/3(16) “named fiduciary” make sense?
R.L. “Dick” Billings, CPC, CEBS, RF, ERPA is Director of Marketing with Arizona-based Fiduciary Wise.
R.L. “Dick” Billings, CPC, CEBS, RF, ERPA is Director of Marketing with Arizona-based Fiduciary Wise.
