Sponsoring a workplace retirement plan has become somewhat of a catch-22 for business owners. It’s practically required to have one to stay competitive in today’s tight labor market. After all, the American Institute of CPAs found that 80% of workers would keep a job with benefits even if offered another job with higher pay and no benefits. In another survey, 79% of workers said that competitive benefits are a major influencer in their employment decisions. (1)
So, while your business owner clients may feel obligated to sponsor a retirement plan, doing so brings a lot of extra risk and responsibility. Most business owners already have all of the risk and responsibility they want to take on, so they turn to professional 3(16) fiduciaries to help them with their retirement plans.
What Is A 3(16) Fiduciary?
In the Employee Retirement Income Security Act (ERISA) that governs retirement plans, there are three different types of fiduciaries, or people who can take on legal liability for the plan. Named after the sections of the law in which they are found, the types of fiduciaries are 3(38), 3(21), and 3(16). The first two have investment responsibilities and the last has administrative responsibilities.
Section 3(16) of ERISA lays out the administrative responsibilities of delivering proper and timely fee notifications, providing summary plan descriptions, maintaining the plan’s tax-qualified status, filing and signing the plan’s Form 5500, and ensuring the plan is operating in accordance with the plan document. The person who takes on these responsibilities becomes a 3(16) fiduciary. Usually, this falls to the plan sponsor’s HR department, but it can also be outsourced.
Outsourcing 3(16) Fiduciary Responsibilities Brings Added Expertise
Most HR departments have a lot going on, and administering the company’s retirement plan just becomes another item on a to-do list. Because it’s a small part of their job, most HR professionals don’t have expertise in retirement plans or the time to devote to developing it. After all, the laws concerning them are very complex and the regulations are continually changing.
Outsourcing 3(16) fiduciary responsibilities to a firm that specializes in retirement plans can be a great boon to any company’s retirement plan. The knowledge and experience that a firm specializing in 3(16) responsibilities can develop over time are far greater than what any HR department or employee is capable of. Such expertise can lead to fewer administrative errors, greater efficiencies, and more effective implementation.
Outsourcing 3(16) Fiduciary Responsibilities Saves Time
It’s clear that you can save a lot of time for an HR department by outsourcing part of their responsibilities to a professional 3(16) fiduciary. Anything you take off their plate gives them more time for their other obligations.
However, having experts do the work also makes the work itself go much faster. Someone who files a Form 5500 once a year isn’t going to remember all of the nuances after having it out of their mind for 365 days. It will take time to refresh their memory and research any changes that may have occurred in the interim. When someone specializes and files hundreds of Form 5500s throughout the year, they will have everything fresh in their mind and the process will go much more quickly.
Outsourcing 3(16) Fiduciary Responsibilities Lowers the Plan Sponsor’s Risk
While outsourcing 3(16) fiduciary responsibilities can be of great benefit to the retirement plan, it’s also advantageous for the plan sponsor themselves. Being a fiduciary doesn’t just mean you have some tasks to complete. It means you are legally liable and must answer and pay for mistakes.
ERISA litigation has picked up in recent years, and a number of retirement plan fiduciaries have ended up owing huge fines or even facing jail time for breach of their fiduciary duty. When you outsource to a 3(16) fiduciary, you are not only outsourcing responsibilities but legal liability as well. Many business owners find that the peace of mind that comes from taking that risk off their shoulders is just as valuable as the more tangible benefits of outsourcing.
While a plan sponsor cannot outsource all of their legal liability (after all, they are responsible for hiring the 3(16) fiduciary), they can still greatly lower their risk.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. 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 around the nation, 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.