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Customized Service Models for 3(16) Fiduciaries

Learn about the business need for 3(16) fiduciaries, the legal definition, risks, and types of services they provide. Discover the limits on an employer's ability to transfer duties and best practices to mitigate fiduciary risk.

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Customized Service Models for 3(16) Fiduciaries

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  1. Customized Service Modelsfor 3(16) Fiduciaries Marcia S. Wagner, Esq.

  2. Agenda • Business Need for 3(16) Fiduciaries • Legal Definition • Risks of Serving as 3(16) Fiduciary • Types of 3(16) Fiduciary Services • Limits on Employer’s Ability to Transfer Duties • Best Practices

  3. Business Need for 3(16) Fiduciaries • Challenging Consequences of ERISA • Imposes high standard of care on fiduciary advisors • Same high standard imposed on plan sponsors • Many sponsors do not understand plan administration or ERISA requirements • Currently rely on non-fiduciary providers • Fiduciary risk for oversight failures

  4. Plan Sponsor’s Advantage in Hiring 3(16) Fiduciary • “Outsourcing” of 3(16) Duties and Related Risks • Plan sponsor formally designates third party as 3(16) Fiduciary • Key 3(16) duties for reporting and disclosure are transferred • Other fiduciary oversight responsibilities may be delegated • Fiduciary duty (and related fiduciary risk) transferred to third party

  5. What is a 3(16) Fiduciary? • Business Definition • Third party that takes on substantial plan management responsibilities • Employers traditionally retained these duties • Observations • Business definition refers to a mix of 2 legal roles: - Administrator as defined in ERISA Section 3(16) - Named Fiduciary • Legal definition varies from business definition • Scope of third party’s role can vary considerably

  6. Legal Definition of 3(16) Administrator • “Administrator” Defined in Section 3(16) • Special fiduciary designated in plan document • Employer is plan’s 3(16) Administrator by default • Has ERISA reporting and disclosure duties • Does not refer to traditional TPA firms providing non-fiduciary services

  7. Reporting and Disclosure Duties of 3(16) Administrator • Special Duties Imposed on 3(16) Administrator • Provide SPDs • Provide Benefit Statements • Provide 404a-5 Participant Disclosures • Provide Plan Document (upon request) • Sign and File Form 5500 • Arrange for Plan’s Financial Audit (as necessary)

  8. Legal Definition of Named Fiduciary • Definition of “Named Fiduciary” • Named in plan document • Employer traditionally serves in this role • Powers of Named Fiduciary • Managing investment menu • Administration of plan • Engaging service providers

  9. Employer’s Traditional Role • Serves as 3(16) Fiduciary • Plan document designates employer as 3(16) Administrator • Participant disclosures prepared by plan’s TPA, but employer retains ultimate responsibility • TPA prepares Form 5500 and employer reviews/signs • Employer must arrange for audit (for large plans only)

  10. Employer’s Traditional Role • Serves as Named Fiduciary • Hires and manages providers, including RK/TPA • Oversees plan administration, including compliance • Interprets plan and decides benefit claims

  11. Transferring Duties from Plan Sponsor to 3(16) Fiduciary • “Administrator” Duties • Plan document names third party as 3(16) Administrator • 3(16) Fiduciary becomes responsible for reporting and disclosure requirements under ERISA • “Named Fiduciary” Duties • Plan document names third party and employer as Named Fiduciaries • 3(16) Fiduciary assumes significant plan management responsibilities, but not all

  12. Risks of Serving as 3(16) Fiduciary • High Standard of Care Imposed Under ERISA • Duty of Loyalty: All decisions must be made solely in interest of participants • Exclusive Purpose: Fees for service providers must be reasonable • Duty of Prudence: Must provide services (including selection of other providers) in a prudent manner • Plan Governance: Plan document must be followed

  13. Fiduciary Liability and Penalties • Civil Actions Under ERISA • May be brought by DOL, participants or co-fiduciaries. • Breaching fiduciary is personally liable. • DOL Civil Penalty • Penalty amount is 20% of applicable recovery amount. • Excise Taxes

  14. Co-Fiduciary Liability • Fiduciary may be liable for co-fiduciary’s breach of duty • If knowingly participates in co-fiduciary’s breach • If own breach enables co-fiduciary’s breach • If knows of co-fiduciary’s breach and fails to make reasonable efforts • Implications • Employer may be liable for 3(16) Fiduciary’s breach • 3(16) Fiduciary may be liable for employer’s breach

  15. Special Liability and Penalty Rules for 3(16) Fiduciaries • 3(16) Fiduciary cannot delegate disclosure and reporting duties • In traditional arrangements, employer remains responsible even if error caused by TPA • Special Penalties • Form 5500 Failure - $1,100 per day (DOL penalty) - $25 per day (IRS penalty) • Disclosure Failure - $110 per day

  16. Mitigating Fiduciary Risk • Duty of Prudence • Procedural prudence has protective value • 3(16) Fiduciary should have documented policies and procedures • Prudence duty also requires substantive expertise • 3(16) Fiduciary should have employees with relevant expertise

  17. Types of Services Offered by 3(16) Fiduciary • TPA Serves as 3(16) Administrator • TPA agrees to be responsible for participant disclosures and 5500 filings • TPA alone would be responsible for any disclosure/reporting errors • Employer would not have ultimate responsibility • TPA’s service agreement may keep employer responsible for providing accurate information

  18. 3(16) Fiduciary’s Ability to Oversee Other Providers • Oversight of Other Providers • 3(16) Fiduciary may hire other providers to assist with participant disclosures and Form 5500 • Remains responsible as plan’s 3(16) Administrator and must oversee providers • Flexibility for TPA Firms • TPA firm may provide all related services as 3(16) Administrator, or hire and oversee other providers

  19. Responsibilities Transferred to3(16) Fiduciary May Be Limited • Fiduciary responsibilities transferred to TPA may be limited to reporting/disclosure only • Plan sponsor remains responsible for all other Named Fiduciary responsibilities • TPA assumes role as 3(16) Administrator only • Illustration • TPA agrees to accept ultimate responsibility for participant disclosures already prepared by TPA • TPA agrees to sign 5500 filings already prepared by TPA

  20. Other Types of Services Offered by 3(16) Fiduciary • TPA may agree to accept plan management responsibilities as Named Fiduciary • Adjudicating benefit claims and disputes • Ensuring operational compliance • Selecting and monitoring service providers • Ensuring plan fees are reasonable • TPA is typically not responsible for investments • Scope of Named Fiduciary Responsibilities • Will depend on plan document provisions and service agreement

  21. Oversight of Plan’s Recordkeeper • Importance of Recordkeeper’s Role • Recordkeeper is typically responsible for generating participant 404a-5 disclosures and statements • Also provides website and system for processing participant transactions • 3(16) Fiduciary is responsible for disclosures and may also be responsible for plan administration • When Plan Sponsor Hires Recordkeeper • 3(16) Fiduciary should require use of approved recordkeeper to ensure plan runs properly

  22. 408(b)(2) Fee Disclosures of Recordkeeper • When 3(16) Fiduciary Hires Recordkeeper • Recordkeeper must provide 408(b)(2) fee disclosures to 3(16) Fiduciary • Plan Sponsor should consider requiring 3(16) Fiduciary to disclose recordkeeper’s fees • Should also confirm 3(16) Fiduciary is not hiring affiliated recordkeeper or receiving “kickbacks”

  23. 3(16) Fiduciary’s Non-Fiduciary Services • Types of Non-Fiduciary Services • 3(16) Fiduciary may offer bundled recordkeeping and TPA services • May also offer TPA services only • When Offering TPA Services • 3(16) Fiduciary must coordinate its TPA services with recordkeeper’s administrative services • Areas of potential overlap include preparation and delivery of disclosures, loans and withdrawals

  24. When 3(16) Fiduciary Hires Non-Fiduciary Providers • Relationship with Other Service Providers • 3(16) Fiduciary’s duties as 3(16) Administrator include hiring accounting firm for audit as necessary • Additional duties may including hiring non-fiduciary service providers (e.g., recordkeeper) • Accountability of 3(16) Fiduciary • 3(16) Fiduciary has duty to prudently select and monitor provider on ongoing basis • Not accountable for individual errors of provider, but responsible for prudent selection and monitoring

  25. Customizing TPA Firm’s 3(16) Fiduciary Services Model • Determining TPA’s Fiduciary Services • May accept responsibility for 5500 reporting and disclosures as plan’s Administrator • May also accept comprehensive management responsibilities as plan’s Named Fiduciary • Illustration: TPA agrees to adjudicate benefit claims • Consider TPA’s Expertise and Procedures • Prudent process must be established for each fiduciary service • Illustration: Benchmarking review conducted to satisfy TPA’s duty to evaluate reasonableness of fees

  26. Limits on Employer’s Ability to Transfer Responsibilities to 3(16) Fiduciary • 3(16) Fiduciary may accept broad role as both 3(16) Administrator and Named Fiduciary • But employer cannot eliminate all fiduciary oversight responsibilities. • Employer typically remains responsible for plan investments (or hiring 3(38) investment manager)

  27. Employer’s Duty to Monitor 3(16) Fiduciary • Plan sponsor remains liable for monitoring 3(16) Fiduciary. • Employer’s authority to amend plan document represents power to replace 3(16) Fiduciary. • Employer should review performance of 3(16) Fiduciary at reasonable intervals. • No need for employer to monitor other providers if responsibility transferred to 3(16) Fiduciary.

  28. Other Responsibilities Retained by Plan Sponsor • Coordination of Fiduciary Responsibilities • Any responsibilities not accepted by 3(16) Fiduciary remain with Plan Sponsor • 3(16) Fiduciary’s agreement and plan document should be reviewed to confirm responsibilities

  29. 408(b)(2) Fee Disclosures • Fee Disclosure Requirements • 3(16) Fiduciary must describe services and fees • Must also identify any subcontractors and disclose their compensation • Description of services should be consistent with plan document and service agreement

  30. Suggested Best Practices:Scope of Fiduciary Services • Level of 3(16) Fiduciary Responsibility • Offer fiduciary service only if prudent process can be established and followed • Document selection and monitoring criteria when hiring other providers • Prepare regular reports of other providers’ services • Advisability of Different Service Levels • Simpler and easier to provide uniform level of fiduciary oversight across all plan clients

  31. Suggested Best Practices:3(16) Contractual Considerations • Service Agreement for 3(16) Fiduciary • Should state which responsibilities will shift to TPA • Should confirm that Plan Sponsor remains responsible for hiring 3(16) Fiduciary • Plan Sponsor should remain responsible for providing complete and accurate information • Coordination with Plan Document • Confirm Administrator and Named Fiduciary provisions are consistent with agreement • Plan document may provide that both TPA and Plan Sponsor will serve as Named Fiduciaries

  32. Suggested Best Practices:Monitoring Support for Plan Sponsor • Employer’s Duty to Monitor 3(16) Fiduciary • Must monitor 3(16) Fiduciary’s performance at reasonable intervals • Plan Sponsor should ask for regular updates • Illustration • 3(16) Fiduciary provides updates on annual basis • Updates include summary information of: (1) number of benefit claims adjudicated (2) exception reports identifying potential issues (3) performance assessment of other providers (4) benchmarking analysis

  33. Conclusions • Important Considerations • There is a business demand for 3(16) Fiduciaries • 3(16) Fiduciaries provide services as a plan’s 3(16) Administrator and Named Fiduciary • Fiduciary risks may be mitigated through procedural prudence and substantive expertise • Certain limited duties cannot be transferred from plan sponsor to external 3(16) Fiduciary • But TPA firms still have substantial freedom to adopt customized 3(16) Fiduciary service models

  34. Important Information This presentation is intended for third party administrators and other service providers to 401(k) plans and other retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). This information is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or its affiliates.

  35. Customized Service Modelsfor 3(16) Fiduciaries Marcia S. Wagner, Esq. q. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0147439

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