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3(16) Providers Revisited


TPAJake

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In light of the recent spread of 3(16) service providers in the 401k industry, I think the subject has earned another look (we haven't discussed since 2014 that I can find).  Full disclosure: I have recently switched from a TPA shop to a national 3(16) provider, so I may be a bit biased!  

I always had a similar view to those expressed in the 2014 thread linked below, but since joining the 3(16) space I've really been surprised by just how much we take out of the Sponsor's task list & the amount of thanks we constantly receive from clients.   

I'm sure plenty of you have run across 3(16) providers in various capacities over the last 3 years, so have any of your opinions changed?  Do you have any questions about the blurry line that exists between us, the TPA & the client?    

 

 

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15 hours ago, TPAJake said:

I always had a similar view to those expressed in the 2014 thread linked below, but since joining the 3(16) space I've really been surprised by just how much we take out of the Sponsor's task list & the amount of thanks we constantly receive from clients.   

 

Perhaps you can define what you do as a 3(16) fiduciary.  The reason I ask is many of those who claim to take work off the plates of the plan sponsor are simply doing that which many bundled service providers do - but do so in a non-fiduciary capacity (allegedly).  For example, the service provider I work with processes loan, hardship, and distribution request without plan sponsor involvement - except to engaging our services to do so, and agreeing to our loan, hardship and distribution policies and processes.  Similarly, we do full DRO outsourcing.  We provide ministerial investment reporting, forms 5500 (but we don't sign them - but for plans that our audited and in an automated environment, "pushing the button" is not that difficult).

All of that is, admittedly, the tip of the iceberg in terms of what could be done - but frankly, I've not seen (and I haven't been looking) many 3(16) providers who do much more - except they claim to do so as a fiduciary (the value of which is always a subject for robust debate!)

Since it's been several years since I've reviewed 3(16) service providers, perhaps level setting what is meant by that service today would be the start of the discussion....

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One (not the only) important test of how much value there is in getting tasks performed by a fiduciary (rather than by a non-fiduciary service provider) is about whether the fiduciary meets its co-fiduciary responsibility under ERISA section 405(a)(3).

For example, if a fiduciary knows the employer deliberately has not paid into the plan's trust amounts intended as participant contributions, does the fiduciary sue the employer or call this information to the attention of participants so they can pursue their rights?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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32 minutes ago, Fiduciary Guidance Counsel said:

One (not the only) important test of how much value there is in getting tasks performed by a fiduciary (rather than by a non-fiduciary service provider) is about whether the fiduciary meets its co-fiduciary responsibility under ERISA section 405(a)(3).

For example, if a fiduciary knows the employer deliberately has not paid into the plan's trust amounts intended as participant contributions, does the fiduciary sue the employer or call this information to the attention of participants so they can pursue their rights?

You are preaching to the choir on that one.  For most of my career (30+ years now) I've been fighting the "well, we'll be a fiduciary so your liability goes down" mantra of those who don't understand co-fiduciary liability (and the attendant monitoring of hired fiduciaries by the plan sponsors or other hiring fiduciary).

 

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Sorry RBG, I guess my search skills aren't what they used to be--Let me know if there are any unresolved issues in those threads I may be able help with.  

Our services are defined by the contract, but generally range from mailing notices all the way up to payroll submissions & census preparation.  There's a lot of things in between, but essentially we take the daily operations of the Plan away from the Sponsor so they can go back to manufacturing widgets, or running hotels, or pumping oil, etc.  As a TPA, I always hated sending tasks to the client & praying that they would complete them!  Our TPA partners & bundled providers actually love us because they get solid census data, pulled from the payroll system directly by a 401k plan professional who knows what to look for--They no longer have to rely on an 85 year old payroll part-timer's data or the revolving door of HR & payroll contacts at the Plan Sponsor.

To answer Mr. Gulia, we would certainly not call upon Participants to sue a client, but I feel like you knew that already.  We would keep the records & contribution reconciliations required by Counsel in the event of such a case though.  We would also ensure that those amounts are properly listed as receivable until the funding is satisfied.

There is a fair bit of marketing that goes into all aspects of this industry, but I can assure you the service we provide is very real & different from what a TPA would normally offer.  Obviously I'm not here to sell you anything, that's not my role & even if it was I would not walk into this lion's den peddling my wares!  I do think there is a natural tendency for TPA's to dismiss 3(16) as an unnecessary expense & I want to share my experience, which has been contradictory to that opinion.  Our clients include small plans & large, both bundled & unbundled--Believe me they all have their "we don't do that" items.  For me, it's more about the convenience for the Sponsor & less about the fiduciary liability, but that does have some value for the client.  It's important to remember that we are discussing concepts on a daily basis that are very foreign to the plumbers & golf course managers of the world, but they still need a 401k.  

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I apologize for an ambiguity in my observation.  I wasn't advocating a view. 

Also, my question asks whether a hired fiduciary will add value by whistleblowing against the employer that engages the hired fiduciary.

MoJo reminds us about an appointing fiduciary's responsibility to monitor an appointee's work at least enough to decide whether to continue or end the appointment.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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TPA Jake - We are a TPA who could easily double our fees and be a 316.  We struggle with what additional value we are adding.  I can already mail notices without being a fiduciary, and I'll charge an hourly rate to do so.  Compile the census?  Give me a payroll download from your payroll provider and I'm good to go.

But listen, to rebeat a dead horse.  If you have a client who neglects to tell you who the family members are; or if the client census does not use the proper definition of compensation; or if your client failed to automatically enroll a participant who is eligible; or if they reported incorrect hours for someone and the vesting was incorrect; or if they hired a temporary employee without telling you this and did not recognize that service for eligibility; or if the client deposited Johnny's money into Susan's account and Susan already took a full distribution by the time it was discovered; or if the client forgot to send in the 401k withheld from the bonus run; or if the plan document does not exclude bonus, but the client failed to withhold 401k and therefore match from the bonus; and on and on and on and on; who is responsible?

I've just listed the kinds of problems that have gotten my clients into trouble.  And as a 316 I cannot figure out how to take responsibility for any of it.  Have you had a critical matter arise related to a Summary Annual Report, or the formality of signing a 5500?  How about a critical issue related to a fidelity bond?  the answer for me is no and no and no.  So what the heck would I be charing all of that money for?

Listen, I hope you have an answer, because I would LOVE to double my fees, and that's the God's honest truth.

 

Austin Powers, CPA, QPA, ERPA

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No, I'm pretty sure whistleblowing against the plan sponsor that hires us is not covered in our contract. We do however find plenty of unintentional issues that we refer to TPA or other party for correction.  Once that correction is prepared, we do check it & sign as plan administrator. As far as monitoring is concerned, I think it's pretty unlikely that my client will monitor me in any way, but we would monitor the investment providers, advisors & other parties on their behalf. 

Austin, I get the impression from all of your posts over the years that you go above & beyond for your clients. I applaud you for that, but you are the exception, not the rule. I can tackle your list tomorrow, but for now I'll say that in general, if they checked every box on our contract, we are responsible for those items. We would be processing the payrolls, checking the comp used for various purposes, monitoring those mystery HCE situations & bringing a missed bonus contribution to the client's attention. We just find it a lot sooner than the TPA can. We would also be listed on the fidelity bond & 5500 as plan administrator, so if anybody is getting sued, I'm pretty sure we would be named in the suit as well.

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That is a question for the person who writes the contract--I just work here.  What's with all the animosity this group seems to be directing at 3(16) providers?  Is it just a perceived lack of value, or are we considered some nefarious force that's trying to steal clients?     

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TPA Jake, I cant imagine how you can do what you are saying unless you are the one processing the payroll, etc.  Are you part of an employee leasing copany where you are directly employing the people who are participating in these plans?  I just don't have access to the day-to-day procedures to be able to prevent and/or detect these things.

Austin Powers, CPA, QPA, ERPA

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We do indeed process payroll for most of our clients & I have a dedicated team for payroll tasks.  We have direct access to their payroll systems & file the submission each period, though I'll refrain from sharing which providers are terrible.  I'm sure most of you know already!  All the client does is deposit the money, which we also monitor.

15 minutes ago, austin3515 said:

I just don't have access to the day-to-day procedures to be able to prevent and/or detect these things.

We do have that access & we do detect these things, it's a huge part of our job.  The TPA's we work with love it.  

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Geeze, that's a pretty pertinent piece of information to this discussion.  Of course if you are the one doing everything it is only appropriate and fair that you should take responsibility for it.  I personally relish the opportunity to have an open MEP plan for all those reasons - an Open MEP where part of it is that each participating employer has to use the same payroll provider that we can work with.  That's not too much different than what you are describing.

But that's just not the same thing as me being hired as TPA and being a 316 which is really what my comments are targeted to.  You are doing 316 the right way.  It's not you I have a gripe with.

Austin Powers, CPA, QPA, ERPA

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3 hours ago, TPAJake said:

That is a question for the person who writes the contract--I just work here.  What's with all the animosity this group seems to be directing at 3(16) providers?  Is it just a perceived lack of value, or are we considered some nefarious force that's trying to steal clients?     

I don't know that it is animosity towards those who profess being "fiduciary" 3(16) service providers, but rather what is perceived as being "unclear" marketing - where some of those providers profess 1) to REDUCE the fiduciary liability of the plan sponsor (bullsh!t!); and 2) they profess to relieve HUGE burdens being placed on plan sponsors (when in reality, many bundled service provider do most of the things you list, and many TPAs can do so as well in a NON-fiduciary capacity).

That which is "nefarious" is the promises of doing so much more for plan sponsors, when people like me sit back and scratch our heads and think - we've been doing most of that already for 20 years or so.  The things we don't do - like "sign" a form 5500 are not exactly perceived of by the industry or it's clients as being burdensome.  Hence, my initial request of:

On 4/18/2017 at 8:20 AM, MoJo said:

Perhaps you can define what you do as a 3(16) fiduciary.  The reason I ask is many of those who claim to take work off the plates of the plan sponsor are simply doing that which many bundled service providers do - but do so in a non-fiduciary capacity (allegedly).

I would add - why are the services you list above something that can't be done by a non-fiduciary service provider?

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That's one of the reasons I wanted to have this discussion, as I feel somewhat qualified to answer these questions from both sides--I was a TPA for a decade & came here with a similarly skeptical attitude.   I've been pleasantly surprised at the reality of this service & the response from clients.

We all know that in the case of litigation, the Plan Sponsor will be first against the wall, regardless of whether there is a co-fiduciary arrangement & I'm not an ERISA Attorney.

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Of course a TPA could do all of the things we do, they just have historically refused to do so.    Many of the competitors in the 3(16) space are in fact TPA's that offer this as an add-in service & charge higher fees as Austin implied.  I would wholeheartedly agree that signing a 5500 is not burdensome, or even worth charging for by itself, it's simply something Joe the plumber is not comfortable doing. As far as reducing the other burdens of running a plan, we do take large amount of admin work off the Sponsor, but we all know Plaintiff's Attorney is listing the Sponsor first every time--No stopping that with a 3(16) contract.  

As far as what I do, it is again defined by each contract but so far today:

Fix incorrect payroll limits & calculations in a client's ADP account, send incorrect testing back to a TPA for revision, revise incorrect plan provisions in a bundled provider's system, and mailed out a fee change notice for 4000 Participants...It's about lunch time I think! 

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47 minutes ago, TPAJake said:

As far as what I do, it is again defined by each contract but so far today:

Fix incorrect payroll limits & calculations in a client's ADP account, send incorrect testing back to a TPA for revision, revise incorrect plan provisions in a bundled provider's system, and mailed out a fee change notice for 4000 Participants...It's about lunch time I think! 

Interesting.  What I would call this list is "HR outsourcing" and not "3(16) services."  I don't see any of these as "fiduciary" functions - and the latter two are things we as a bundled service provider do as well - without additional charge - and mostly without plan sponsor involvement.

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I have to agree that it sounds more like HR/Payroll outsourcing (and it being done much better than those in a company that have no HR/Payroll background) than 3(16) services... When I worked for one of the top three HR consulting firms many moons ago, we did much of what you listed...

 

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I would agree with the HR outsourcing assessment, but we only deal with the 401k portion--I don't want to sell HR teams across the country short by pretending 401k is all they do. Some bundles provide notice service, some don't, but we monitor either way for proper execution.  Some don't even know their own policies & procedures.  I have not been impressed with most of the bundled provider's ability to make their own recordkeeping system match the Plan Document, but I'm sure some are better than others.   

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2 hours ago, TPAJake said:

Some bundles provide notice service, some don't, but we monitor either way for proper execution.  Some don't even know their own policies & procedures.  I have not been impressed with most of the bundled provider's ability to make their own recordkeeping system match the Plan Document, but I'm sure some are better than others.   

Well, it truly is a sad state of affairs when a plan sponsor needs to hire another vendor to provide monitoring of the services another vendor is being paid to do, just to ensure they are doing it, or doing it correctly.

Seems to me that if that is the case, then the "marketplace" has failed to punish those vendors that don't live up to their obligations.

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If you’re interested in learning more, ASPPA’s Eastern Regional conference in Philadelphia next Thursday includes this workshop:

 

Co-Fiduciary Liability with 3(16) Services and Their Implications

Many third party administration firms now include as part of their service options taking on the role of ERISA 3(16) “Plan Administrator.”  The decision to offer this service should include consideration of factors beyond the plan administrator duties themselves.  Learn about the co-fiduciary issues, how the law is interpreted and ethical dilemmas that you could find yourself addressing.  Attendees will understand:

  1. 3(16) service responsibilities;

  2. Co-fiduciary issues related to 3(16) services; and

  3. “Landmines” with respect to the service offering.

 Ilene H. Ferenczy is the presenter, and I am the moderator.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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