Every 401(k) plan needs a caretaker to ensure that regulations and plan rules are followed. By default, this caretaker is the plan sponsor, specifically the person that signs the 5500. Under ERISA, the plan's caretaker is called the 3(16) plan administrator and they are responsible for ensuring day-to-day plan administration complies with ERISA, the Internal Revenue Code and plan documents.
And the stakes are high - under ERISA even small errors can result in large, unexpected costs, penalties and fines.
Luckily, employers can delegate this responsibility to an independent 3(16) fiduciary that can reduce administrative burdens and lower liability for the company.
In fact, a 2022 study found that over 80% of employers are increasingly interested in adding a 3(16) fiduciary to help employers save time and reduce the liability with their 401(k) plan operations. In fact, this study found that over 80% of 401(k) advisors now recommend adding a 3(16) fiduciary.
To understand the growing popularity, one only needs to look at 2022 Department of Labor (DOL) compliance enforcement.
Why employers add 3(16) fiduciaries?
Employers are increasingly interested in 3(16) fiduciaries because outsourcing day-to-day plan operations can be a powerful way to reduce liability for the company and, more importantly, save time that can be better used growing the business.
Reason 1: Reduce liability
2022 was a fantastic year for the Department of Labor - they recovered $1.4B from their retirement plan enforcement actions, closed 66% of investigations closed “with results” and 103 criminal indictments were filed “including plan officials, corporate officers, and service providers.”
How can it be that two out of three plans investigated by the DOL resulted in enforcement? Simply put, plan sponsors are held to a virtually impossible standard - they must comply day in and day out with thousands of pages of rules - from ERISA to the Internal Revenue Code and plan documents.
Or as a Forbes article wrote:
If the road to hell is paved with good intentions, perhaps the same could be said about many of today’s 401K plans. Employers craft benefit packages with the best of intentions, yet, there’s a good chance you may be administering… a retirement plan not in compliance with new Employee Retirement Income Security Act of 1974 (ERISA) regulations.
Reason 2: Save time
While the most diligent and well-trained plan sponsors may be able to comply with all of the rules, they do so at great time and expense. In fact, the 2022 3(16) Survey also found that employers could significantly cut workload by working with a 3(16) fiduciary.
65% of advisors said that clients are spending up to 25% of their time on retirement plan administrative work that could be outsourced, with another 25% saying they’re spending from 25% to 50% of their time on administrative work.
What is a 3(16) Fiduciary?
A 3(16) fiduciary, also known as a 3(16) plan administrator, is an expert in retirement plan administration. They help employers manage the day-to-day tasks and responsibilities of their retirement plans, ensuring everything runs smoothly and stays compliant.
Business owners often have a lot on their plates, and managing a retirement plan can be overwhelming. That's where 3(16) fiduciaries come in. They take on the burden of administrative tasks, giving business owners the peace of mind they need to focus on growing their companies.
Why Are 3(16) Fiduciaries Important?
The Department of Labor (DOL) has high expectations for plan sponsors (business owners) when it comes to managing their retirement plans. But let's be honest, most business owners aren't experts in this area. That's where 3(16) fiduciaries step in.
3(16) fiduciaries are important because they help plan sponsors stay compliant with all the rules and regulations surrounding retirement plans. They handle various tasks, such as managing employee enrollments, processing distributions, and maintaining plan records. By taking on these responsibilities, 3(16) fiduciaries help plan sponsors avoid potential fines and penalties.
How Do 3(16) Fiduciaries Differ from Other Fiduciaries?
There are different types of fiduciaries that focus on various aspects of retirement plan management. For example, 3(38) and 3(21) fiduciaries primarily focus on investment-related matters.
In contrast, 3(16) fiduciaries are all about the daily operations and administration of retirement plans. They take on fiduciary liability for the plan's administrative tasks, ensuring everything is done correctly and on time.
What is the difference between a full-scope and limited-scope 3(16) Fiduciary?
Full-scope 3(16) fiduciaries cover a wide range of compliance responsibilities whereas limited-scope 3(16) fiduciaries generally provide limited coverage for select responsibilities. Moreover, limited-scope 3(16) fiduciaries often won't take responsibility for the issues that are likely to cause errors (like payroll problems) or limit their liability to amounts that won't come close to covering potential DOL penalties or fines.
Adding a full-scope 3(16) fiduciary is like adding comprehensive auto insurance when you have 66% chance of getting in an accident. Without it, you may be responsible and liable for the penalties and fines of plan mistakes (remember 66% of DOL investigations in 2022 resulted in recoveries).
Given the $1.4B in DOL recoveries in 2022, more employers are opting for comprehensive full-scope 3(16) coverage since a plan fiduciary literally has their personal assets on the line.
We offer full 3(16) fiduciary services on all of our plans, no matter the size. And we relieve our client of the work and liability for the following plan administration responsibilities:
- Review, process, and monitor all 401(k) loans
- Maintain plan documents for IRS/DOL laws
- Track employee eligibility and send the right notices and disclosures.
- Review, approve, process, and document all hardship withdrawals
- Make sure your employee communications meet the Department of Labor's requirements.
- Make sure nondiscrimination tests were run appropriately, then review, sign, and submit IRS filings (especially your Form 5500).
- Make sure 401(k) plan rules are followed (example: making sure contributions are legitimate, tracking loans, etc.)
- Notify plan administrator of any observed plan irregularities
- Ensure plan administrator maintains fiduciary insurance and a sufficient fidelity bond
- Ensure employee contributions are processed correctly and credited to employee accounts quickly.
- Manage and send participant notices and disclosures, including: Annual 404(a)(5) notices, Annual Qualified Default Investment Alternative (QDIA), Safe Harbor notices, Summary annual reports, & Summary of material modifications
What Should You Look for in a 3(16) Fiduciary?
When choosing a 3(16) fiduciary, it's crucial to find a provider with a strong track record of expertise and accountability. They should have experience working with retirement plans similar to yours and be able to handle the various administrative tasks involved. They should have the ability to integrate with both your payroll system and your 401(k) recordkeeper to eliminate tedious manual payroll processes and check payroll data to make sure it is timely and correct. Most importantly, they should be able to show how they stood behind their work and paid penalties and fines for their clients when mistakes happen. Because, no matter how good their technology and how expert their teams, if they've been in business long enough there will likely be operational errors.
Some key qualities to look for in a 3(16) fiduciary include:
- Expertise in retirement plan administration
- A proven history of helping businesses stay compliant
- Excellent communication and customer service skills
- A commitment to staying current with regulatory changes
Wrapping Up: Why 3(16) Fiduciaries Matter
In a nutshell, 3(16) fiduciaries play a vital role in helping businesses manage their retirement plans effectively and stay compliant with the ever-evolving rules and regulations. If you're a business owner or financial advisor, it's definitely worth considering partnering with a reputable 3(16) fiduciary to streamline your retirement plan administration and minimize risks.