3(16) Fiduciary Status

[austin3515]

Can someone please clarify something about this new trend? If any of you all have had the same experiences as me, most of my clients problems do not originate from the services covered by 316. So for example, clients are not experiencing "liability" issues because of mailing out disclosures, failing to adopt timely amendments, signing 5500's, etc. I'm not saying that there are no problems with those things (nor potential liability) but certainly no "significant" liability that I have ever seen (in fact nothing beyond the DFVC user fees in my experience).

The problems come from things like this:

-Client provides bad census data (perhaps excluding anyone not contributing)

-Client does not implement automatic deferrals or does not implement a participant election

-Client inadvertently deposits Susan's 401k into Suzanne's account.

-Client does not send in 401k for a pay-period because someone was on vacation

-Loan payments do not get set up on the system.

-401k is not suspended for 6 months after a hardship

-A rehired employee is not permitted back into the plan after rehire

-Safe Harbor Match got deposited to the Regular Match account, and then people forfeited money when they closed their accounts.

-Even though requested on the census, family relationships are not disclosed

-Even though requested on the census, other affiliated entities are not disclosed

I just have a very hard time believing that these are the types of things for which the 316 will accept any responsibility whatsoever. In other words, while the 316's are out there saying "reduce/eliminate" your fiduciary liability, it seems to me they have only closed the door on the most benign of exposures.

Please let me know, maybe I am missing something. Maybe they are reviewing every transaction during the whole year and I just don't know what I'm talking about. Has anyone ever seen the contracts? My suspicion is that there are dozens of scenarios for which the 316 says "well, that's not my problem."

[BG5150]

How many of your "plan administrators" really go through the numbers you put on the 5500. How many clients are doing annual vendor reasonableness reviews? How many are truly reviewing the reports you send for accuracy? How many are really preparing and delivering the disclosure notices properly?

How many clients want to spend money on attorneys when that one disgruntled employee decides to sue every Tom, Dick & Harrry out there when he gets fired, including the plan?

[austin3515]

How many clients want to spend money on attorneys when that one disgruntled employee decides to sue every Tom, Dick & Harrry out there when he gets fired, including the plan?

Because they won't sue the plan sponsor? They sue everybody something goes wrong, certainly the plan sponsor.

You seem to have experience in this - are the things I mentioned the 316's responsibility if they go wrong? I'm not suggesting the 316 status brings nothing to the table, only that the issues it addresses are low-probability issues.

[Bird]

I haven't done a lot of research on this, but I think you have it right - the things that you'd want to be covered aren't. It's more about "monitoring" investments and investment-related stuff than administrative operations. They're going to spit out a bunch of reports about performance and whatnot that is of little or no value, but can be used to justify fees and, in the unlikely event of a lawsuit, show "due diligence."

[BG5150]

Because they won't sue the plan sponsor? They sue everybody something goes wrong, certainly the plan sponsor.

You seem to have experience in this - are the things I mentioned the 316's responsibility if they go wrong? I'm not suggesting the 316 status brings nothing to the table, only that the issues it addresses are low-probability issues.

The 3(16)s responsibilities go as far as the agreement with the plan sponsor goes. I would certainly add some sort of "garbage in, garbage out" provision in any agreement, distancing myself (as 3(16)) from bad data.

3(16)s can also limit the administrative burden on the employer. We have a lot of 20-100 person companies as clients. many times, the owner wears the plan administrator hat. Does she want to have to come in to work and worry about shuttling loan paperwork between the TPA and participant or poring over a QDRO? Let the owner run her company. Plan administration is my bailiwick, not hers.

[austin3515]

Your last paragraph was exactly my point. I do that now as TPA. Why pay more for the same exact service? The only answer is because there is less liability. Note that liability is not eliminated, only reduced. Does the certainty of higher fees today justify the elimination of a remote liability, pertaining to something like a QDRO or loan paperwork?

[BG5150]

I believe they do.

[MoJo]

Selling 3(16) FIDUCIARY services, IMHO is just the latest "marketing gimmick." In most cases, the "admin" work of running a plan is handled by service providers in a non-fiduciary capacity that relieves the "day to day" burdens of operating the plan. Loan approvals, (safe harbor) hardship processing, Form 5500 prep, and the like are staples of the service provider industry and they have been doing it for decades as part of their service model.

The question to ask is what does the plan sponsor actually gain from having those services now performed as a fiduciary function by a vendor, rather than having those services provided by a vendor in a non-fiduciary capacity? In my mind, not much. In either case, the plan sponsor remains a fiduciary and has an obligation to monitor the activities of the fiduciary or non-fiduciary service providers providing services to the plan. The key is: Does the vendor have a process in place that is consistent with performing the function correctly and timely, consistent with the terms of the plan and the standards of ERISA?

If the answer is "no" then whether the service provider is a 3(16) fiduciary or a non-fiducary vendor, the plan sponsor has a problem. I believe there is a common misconception in the industry that a plan fiduciary can "off-load" responsibility by hiring another fiduciary to handle some functions. Only in the case of 3(38) investment management services (where ERISA recognizes that true investment savvy is something that not many plan sponsor may have) does the off-loading provide a "clear" break of liability - albeit in the limited sense of no responsibility for the underlying actual management of plan assets (but the obligations to prudently select and monitor still remain fiduciary obligations of hte plan sponsor). Even "proper delegation" of fiduciary functions to a 3(16) may not have the same "shield effect" that 3(38) has (and the statutory language is different - for a reason).

More fiduciaries in the plan may mean more monitoring, more co-fiduciary liability, more headaches, and ultimately more liability. I counsel clients to 1) inventory fiduciary functions; 2) inventory those who perform them; 3) ensure the right people are performing the right functions (and all functions are covered); 4) develop processes to ensure the functions are performed appropriately; 5) build in "escalation" processes when a performer of a fiduciary function can't follow the process (in other words, DON'T LET THEM WING-IT); and 5) stop paying attention to the fear mongers that want to up sell you a service that you are probably already paying for anyway.

If they can't use appropriate care in performing the non-fiduciary functions (without being paid more to do so as a fiduciary) - fire their a$$ and get a better (non-fiduciary) service provider.

[austin3515]

Amen MoJo.

Do you generally agree with my supposition that the list of things they accept no responsibility for is exceptionally long (and of course is never mentioned in the sales pitch, but rather buried in 12 page engagement letter)?

[MoJo]

austin: The list of exceptions is almost endless.... One would think a FIDUCIARY service provider would be concerned with the accuracy of the data a plan sponsor sends - as not sending accurate data may be a breach of a fiduciary duty for which teh FIDUCIARY service provide may have co-fiduciary liability. And the circle goes on and on. CYA is now synonymous with contract....

Hey! What's Schlicter's phone number (plaintiff's ERISA litigation firm in St. Louis). I may have an idea for the next wave of ERISA litigation.....

[austin3515]

Oh, I'm sure they are concerned with it. But let's say the client left out the manufacturing employees because "they are not eligible for the Plan." There is no way that the 316's engagement letter is going to accept any responsibility for that. Nor for the fact that the plan was, unbeknownst to the 316, top-heavy because the owner's daughter had a different last name and was not coded as an owner.

Of course I'm not suggesting that they should be held responsible. Only that this is an appropriate analogy: The 316 has locked all of the windows in the house, but they left the front door open. In other words the most obvious problems are unaddressed.

[Guest A_Dude]

I would agree with you Austin. I was at seminar last week where another investment "advisory" firm was highlighting the ABB vs Tussey case and how the plan sponsor was basically left to hang by Fidelity. Sorry we told you we would watch the plan fees and take care of you, but you the Plan Sponsor gets sued as the fiduciary; not us And then, they precededed to sales pitch that they would benchmark the plan and watch the fees etc. Take care of the plan sponsor fidicuiary's (just like Fidelity) but they would not be a fidicuiary themselves in the end....

The 3(16) is not going to accept any liabilty they cannot explicity control. And for that matter, most of the things that do go wrong in plans, are things they won't cover. They sell it as if they are releaving the plan sponsor of all their liabilities, but in reality it's not much. The plan sponsor is still supposed to be monitoring them, and is the "master" fiduciary in reality.

[ForksnKnives]

Selling 3(16) FIDUCIARY services, IMHO is just the latest "marketing gimmick." In most cases, the "admin" work of running a plan is handled by service providers in a non-fiduciary capacity that relieves the "day to day" burdens of operating the plan. Loan approvals, (safe harbor) hardship processing, Form 5500 prep, and the like are staples of the service provider industry and they have been doing it for decades as part of their service model.

I couldn't agree more. It's mostly just an upsell on the same services already provided.

The real mess will be what happens when participants file suit. The sponsor is going to get sued anyway and end up pointing fingers at the service provider and see that same service provider point the finger back at the sponsor. There's a great probability that either both end up as co-fiduciaries, eroding the supposed benefit of paying for fiduciary services, or it turns out nobody was performing these fiduciary duties and new claims are exposed.

[austin3515]

The real mess will be what happens when participants file suit. The sponsor is going to get sued anyway and end up pointing fingers at the service provider and see that same service provider point the finger back at the sponsor. There's a great probability that either both end up as co-fiduciaries, eroding the supposed benefit of paying for fiduciary services, or it turns out nobody was performing these fiduciary duties and new claims are exposed

What a fabulous point. I think someone above had already suggested their could be MORE liability, and I think this must be what they are referring to. We run into this even as TPA - our clients sometimes assume we have more responsibility than we do. I've been yelled at because the owner didn't defer the max, as if I set his deductions and process his payroll! Imagine what could happen for clients drinking the 316 Kool-Aid to excess and imagining they have not a care in the world. Everything is taken care of (that is, except for everything that is NOT).

[Guest A_Dude]

That is exactly how they sell it. They don't tell them this; I am not going to do anything more than we do already, but now I'm putting it in writing that I am a part fidicuiary to the plan.

That's also how some advisors sell the benchmarking and everything that they will do for the plan. Except though, the plan sponsor/admin fidcuciary is still the one signing the papers and taking the full weight as fidcuiary in replacing funds, moving services, managing fees etc. But they are sold in the belief that all this is relieved becuase the other party is taking care of it....

Really the problem is that only a fidicuiary is liable to the plan. The rules should probably be a little more like if you are hired to provide professional services to the plan, you are liable for their services. Instead of the hoops of participant sues employer (fiduciary), then the fidiciary would have to sue to professional who failed them. Cut out the middle man, but in this case we would all be against it because it increases our liability.

[austin3515]

To be honest, I don't mind this so much on the investment side because the advisor has so much more control over the critical aspects of that piece. So the universe of complications is almost entirely covered by a good advisor (are the funds any good? Are the expenses reasonable? It's hard to miss the important points...).