In our last article, we discussed the difference between 3(16), 3(21), and 3(38) fiduciaries. This week, let’s dig deeper to understand 3(16) fiduciaries. By definition, a 3(16) fiduciary has a responsibility to ensure the plan is created and managed according to ERISA requirements. In section 3(16), ERISA extends fiduciary responsibility to the plan administrator and defines who may serve in that role.
Section 3(16) states that the plan administrator is either the person named in the plan document or the plan sponsor itself when no one is named. This administrator takes on both fiduciary responsibility and liability. They typically handle reporting and disclosure requirements, summary plan descriptions, participant disclosures, and file the plan’s Form 5500 (Annual Return/Report of Employee Benefit Plan).
Delegating 3(16) Responsibilities
ERISA allows for plan sponsors to maintain complete control and administration of a plan, or to delegate at different levels. Many plan sponsors do not have the staff or expertise to manage their plan and choose to hire a Third Party Administrator (TPA). With a TPA, a plan sponsor outsources some of its administrative duties but retains discretionary control. In such cases, the plan sponsor retains all 3(16) fiduciary responsibility.
Plan sponsors looking to delegate even more authority hire an independent 3(16) fiduciary. The 3(16) fiduciary must be specifically named in the plan document to legally absorb the responsibility for the plan. By hiring a 3(16) fiduciary as a plan administrator, the plan sponsor delegates both its duties and discretionary control. The independent 3(16) fiduciary is even required to sign the plan’s Form 5500, instead of the plan sponsor.
Fiduciary Liability
It is important to fully understand fiduciary liability, which is the legal responsibility of a fiduciary to work in beneficiaries’ best interest and safeguard their assets. A breach of fiduciary responsibility can result in being held personally liable for losses and lost opportunity costs, being required to pay attorney fees, and subjection to Department of Labor civil fines or excise taxes.
Because of the risk involved, many plan sponsors seek to transfer or, at least, share liability for their plans. By hiring a TPA that is not a 3(16) fiduciary, the plan sponsor is able to pass on administrative duties, but they do not transfer any liability because they maintain complete discretionary control.
A 3(16) fiduciary, however, can absorb much fiduciary liability because they are entrusted with discretionary control over the plan. There is no way for a plan sponsor to completely free themselves of liability, though, because the act of hiring a 3(16) fiduciary in itself is a fiduciary function.
For more information about how working with a plan administrator with 3(16) fiduciary capacity can reduce fiduciary liability and improve plan compliance, please contact us at 480.494.8992 or by email at info@ff401k.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.