Understanding 3(16) Administrative Services

The newest is “3(16) Administrator,” and the situation today is much like ten years ago for 3(38) managers—many advisers and nearly all sponsors have never heard of “3(16),” and those who have heard of it are hard pressed to explain what it means.

The Employee Retirement Income Security Act (ERISA) Section 3(16) defines the plan administrator role, which is where the term comes from. The administrator is the fiduciary responsible for overall governance of the plan with the exception of the trustee functions. Together, the trustee and administrator carry nearly all of the legal responsibility for operating a retirement plan subject to ERISA. Most plan documents name a third party—the principal “named fiduciary” as defined by ERISA Section 402(a)—though many documents are drafted such that the administrator is the principal named fiduciary. The nuances matter from a legal standpoint but not much from a practical standpoint.

The key thing to understand about the administrator role is that it is the final frontier—clients have many viable options for getting help with fiduciary responsibility for plan investments, despite the fact that very few clients actually every get in trouble for bad fiduciary investing. On the other hand, lots of clients experience headaches, costs, and formal corrections related to plan administration, yet the number and quality of outsourcing options is miniscule. This is changing.

There are three forms 3(16) administrative services take in the marketplace today:

1. Supplemental, non-fiduciary (“ministerial”) support services such as document mailing and “hands free” processing of loans and distributions;

2. Limited scope acceptance of some of the functions of the plan administrator but not all; and

3. Broad scope acceptance of the administrator role, to include being named as the plan administrator in the plan document and other governing documents and contracts.

The first level expands the traditional concept of a third-party administrator (TPA) to include services not offered previously. The second level has a service provider agreeing to accept fiduciary responsibility for certain specified tasks but not the full administrator role. The third level takes the level of outsourcing to its logical conclusion—acceptance by the service provider of all or nearly all of the functions of the administrator as well as the legal title.

Why Should Clients Care?

Clients should care and do care about 3(16) services even though most have never heard of them. They care because they do not want the administrator role. Most have no clue what the administrator role actually means. They do not want:

• To be named as the named fiduciary, trustee, and administrator in a 90 page legal document, 10 page Investment Policy Statement (IPS), and various contracts;
• To be told they are supposed to spend lots of time and effort governing their plan through education, checklists, and perpetual effort;
• The practical responsibility for doing the work associated with document review, notices, mailings, loans, distributions, QDROs, eligibility determinations, and fifty other sporadic chores;
• The legal responsibility for the consequences of doing those chores wrong, or failing to do them at all—the sorts of failures that any rational business owner recognizes as the inevitable outcome of involving humans in a process; and
• The annoyance of one more job to do when they’re struggling to focus on the one that pays the bills.

Employers don’t want to be the administrator in the vast majority of cases. But they have chosen to be the administrator anyway for two simple reasons:

• Most think they have already outsourced—that their third party administrator is the plan administrator—when in reality they have only obtained clerical help from a non-fiduciary service provider who leaves a multitude of responsibilities on the client’s plate. It is meaningful help, and a good TPA is invaluable, but it’s not the same as outsourcing.
• They didn’t know they had a choice.

The availability of the outsourcing of the 3(16) administrator role is both old and new. Old, in that some TPAs offered this service in the early years after ERISA, judging rightly that this is what their clients would prefer. But these services ran into a variety of problems and risks and a fair amount of confusion about the role, and as a result this option died away until recently. Acceptance of the 3(16) role is currently experiencing a powerful upsurge as providers learn more and more ways to help, spurred in part by the changing climate with respect to acceptance of fiduciary status—in a nutshell, the industry is warming to the idea that it’s OK to accept fiduciary status.

My opinion from fifteen years of client meetings is that employers do not want help running the plan: they just want someone to run it for them. The industry is doing a good job helping run plans on the investment side, but we have barely scratched the surface of the source of 95% of the pain—plan administration.

Pete Swisher, CFP, CPC, senior vice president at Pentegra Retirement Services