Advisers Recommend Fiduciary Outsourcing Services, Mostly for Small Plans

Plan advisers often recommend that clients use fiduciary outsourcing services, alleviating the administrative burden on both advisers and clients, according to new industry research.

Pentegra Services Inc. published a report titled, “Adviser Attitudes Toward 3(16) Fiduciary Outsourcing,” released in conjunction with the firm’s 3(16) Day, celebrating its expertise as a fiduciary services provider. The study polled advisers as to how they helped clients manage retirement plans using fiduciary outsourcing. More than 20% of advisers said their clients spend between 25 and 50 percent of their time on plan administrative tasks that could be outsourced.

“Today, retirement plan administration has become increasingly complex. There are new regulations and increasing compliance burdens,” said Matt Mintzer, Pentegra’s executive vice president, in a statement. “For many employers as well as advisers, the time commitment can be overwhelming and distracts from the more critical responsibility of running a business—time that could be better spent focusing on growth and profitability.”

Fiduciary outsourcing helps to remedy many of the challenges presented by Mintzer. According to advisers, the leading advantages of fiduciary outsourcing are reducing administrative burdens and mitigating retirement plan risk.

However, 65% of advisers said less than one-quarter of their clients currently outsource fiduciary responsibility for 3(16) retirement plan administration. In contrast, only 16% of advisers expressed that 25% to 50% of clients use fiduciary outsourcing services.

What’s more, attitudes do not seem likely to change this year: More than 60% of advisers said that less than 25% of clients plan to add 3(16) fiduciary administrator services in 2023. Only 10% of advisers reported that 50% to 70% of clients will adopt these services.

In the results from the 2022 PLANSPONSOR Defined Contribution (DC) Survey, plan sponsors were asked if their plan employed a third party (TPA, adviser, recordkeeper, etc.) as a 3(16) fiduciary. Of those who responded, 28.2% responded that they do and that the third party has broad enough scope acceptance of the administrator role to include being named as the plan administrator in the plan document. 28.8% said they do employ a third party, but it has only limited scope acceptance of some of the administrative functions; responsibility outside of that scope is retained by plan officials. Of the remaining respondents, 28.1% replied, ‘No,’ and 14% were unsure. 

Additionally, advisers saw different market segments utilizing fiduciary outsourcing to varying degrees. Almost half of advisers said small retirement plans typically use these services, while less than 10% of large and mega plans do. The research returned similar percentages of respondents thought small-market segments could benefit from fiduciary outsourcing, while it is less relevant for large and mega plans.

Although not all clients are on board when it comes to fiduciary outsourcing, most advisers reported that they see the benefits to these services. When it came to familiarity with fiduciary outsourcing, half of advisers surveyed agreed with the statement, “very familiar, I recommend these services to my clients often.”

“3(16) fiduciary outsourcing offers a better way for plan sponsors and advisers to manage these responsibilities,” Mintzer said in the statement. “Clients and advisers enjoy the confidence that comes from having a professional handle the complexities and burdens that come with offering a retirement plan.”