Is there a choice of "3(16)" service providers?

[Peter Gulia]

Some recordkeepers and third-party administrators offer to provide services for a 401(k) plan not merely as a contract service provider but also by expressly accepting responsibility as an appointed fiduciary for a specified set of plan-administrator (not investment-manager) functions.  Business jargon seems to use "3(16)" as a label for this kind of service.

If a plan sponsor wants to engage this service, is there a meaningful choice of providers?

Or is the number that offer this service so few that an employer faces little choice?

 

 

[MoJo]

i can't tell you how many - but I know there are a number (half dozen or so I'm aware of) "independents" that offer some 3(16) services, and a few bundled providers that also provide the service (and the bundled provider I work for is in the "exploratory" phases of offering a suite of 3(16) services).

The problem is, as you note, defining exactly what one means by 3(16) services.  We currently offer termination, in-service, and hardship distribution outsourcing services, but do so as a non-fiduciary.  We also do DRO qualification services - also as a non-fiduciary.  These are service 3(16) service providers tout as being in their bailiwick - and that they can "do it better" as a fiduciary..  The question become, what "additional" value would be offered by doing these as "fiduciary" services.  The "marketing" spin is that by being a "fiduciary" you reduce the fiduciary liability of the plan sponsor/administrator - although it can be argued that liability goes up due to the "prudent selection" and "monitoring" requirements that now attach to the more traditional plan fiduciaries.

Key is "know what you are buying" and have prudent processes in place for making the decision and monitoring....

[Peter Gulia]

Thanks.

While an informed plan-sponsor fiduciary recognizes it never gets out of fiduciary responsibility, some consider it an advantage to replace frequent activities (including deciding claims and responding about court orders), some of which can't be perfectly scheduled, with a periodic, regularly scheduled, review of the service provider's performance on the contracted tasks.

Question for BenefitsLink mavens:

(Assume that the fiduciary can't compel the employer to administrator to administer the plan.)

If it's so that there are only a few available "3(16)" service providers, could that scarcity make it prudent for a selecting fiduciary not to disengage a poorly-performing provider if the selecting fiduciary's reviews show that the other providers are no better? 

 

 

[MoJo]

14 minutes ago, Fiduciary Guidance Counsel said:

If it's so that there are only a few available "3(16)" service providers, could that scarcity make it prudent for a selecting fiduciary not to disengage a poorly-performing provider if the selecting fiduciary's reviews show that the other providers are no better? 

 

I would agree that the lack of specific 3(16) service providers makes the fiduciary decision difficult - and would add that due to the nature of 3(16) services, it may be impossible to find the "one" service provider that is the best fit.  That is, a particular service provider may be adept at service "A" but not so with respect to service "B" - and you may get into a scenario where you make a "fiduciary" compromise to stay with one provider, or have multiple providers (if possible) to provide the services you want - which can rapidly become unwieldy.

I still think the basic decision about whether or not those service are, or should be, fiduciary in nature is the most difficult.

[Peter Gulia]

Thanks.

Others' thoughts?

 

[RatherBeGolfing]

1 hour ago, MoJo said:

The "marketing" spin is that by being a "fiduciary" you reduce the fiduciary liability of the plan sponsor/administrator - although it can be argued that liability goes up due to the "prudent selection" and "monitoring" requirements that now attach to the more traditional plan fiduciaries.

This 100%.  

[Peter Gulia]

Under the format in which a service provider is responsible only to perform its contract (and not as an ERISA fiduciary), isn’t the selecting fiduciary responsible to monitor and evaluate the service provider’s performance?

 

And to do itself whatever is not done by the service provider?

 

[MoJo]

Selecting any service provider- a fiduciary one or a non-fiduciary one is a fiduciary decision, and one that requires monitoring to ensure the selection is still a prudent one.  The difference with selecting a "fiduciary" service provider is that it springs on the selecting fiduciary "co-fiduciary" liability - which in my mind requires a much higher level of monitoring scrutiny.  A non-fiduciary who makes a mistake may be fired - but a co-fiduciary that makes a mistake causes the other fiduciaries to have responsibility to correct the error - as if they made the mistake themselves (admittedly, an over-simplification).

As such, my position is, and has been, do not elevate functions that can be performed "ministerially" to the level of a fiduciary function, as that creates not only the liability for the prudent selection, but the co-fiduciary liability for on-going performance of those functions.

Despite having heard the "pitch" from a number 3(16) service providers, I have yet to have any one of them answer the question of "what's different between your process and the  process the recordkeeper engages in to perform that same function?" - except to have them proclaim "proudly" that they do it as a fiduciary....

Tautological reasoning doesn't go far with me....

[Peter Gulia]

MoJo, thank you for the further thoughts, especially about ERISA 405(a)(3), and generally on why monitoring and evaluating a fiduciary might call for different work than for monitoring and evaluating a non-fiduciary.

About your middle paragraph:  If an employer/administrator does not allocate a function to a "3(16)", doesn't the employer/administrator retain fiduciary responsibility for its prudent performance of the function?

About your third paragraph:  Let's imagine a hypothetical situation in which the procedures and methods for doing the specified functions are exactly the same whether the functions are done as a fiduciary or as a non-fiduciary.  Might it be worthwhile to the plan to spend a little extra to buy the economic value of the 3(16) provider's extra responsibility (and so its potential contribution to making good the plan's losses that result from the 3(16)'s direct breach, or from the employer/administrator's breach that the 3(16) failed to prevent or remedy)?

I recognize that often there might be more sales-pitch sizzle than steak.  But I wonder that there might be some economic significance in an ERISA fiduciary's responsibility.  Else, why would so many service-provider businesses, including many that lack compensation conflicts, have worked so hard over the past 43 years to eschew that responsibility?

 

[A Shot in the Dark]

Over the last few months, our firm has seen that a few broker dealers require that a 3(16) fiduciary must be secured in order for the investment advisor(s)  to work with a 401(k) Plan.

[MoJo]

1 hour ago, Fiduciary Guidance Counsel said:

I recognize that often there might be more sales-pitch sizzle than steak.  But I wonder that there might be some economic significance in an ERISA fiduciary's responsibility.  Else, why would so many service-provider businesses, including many that lack compensation conflicts, have worked so hard over the past 43 years to eschew that responsibility?

"About your middle paragraph:  If an employer/administrator does not allocate a function to a "3(16)", doesn't the employer/administrator retain fiduciary responsibility for its prudent performance of the function?"

Yes, the existing fiduciaries would retain liability for the proper performance of the non-delegated task - but I would add two things:  First, if the "process" is well defined, errors made in completing the process are not problematic from a fiduciary perspective.  The standard is not perfection, but rather what one familiar with the task at hand (and "expert") would do under similar circumstances.  Errors happen, and are fixable absent there being a "fiduciary breach."  The key is to ensure the process undertaken by the non-fiduciary service provider is appropriate and in my experience, those that do it regularly - like a recordkeeper - have decent processes, and those that don't aren't in business long.  Think of it this way - my employer services 5200 plans, and we provide DRO services.  We do about 50-70 a month and know what we are doing.  Most of our clients (plan sponsors) see one DRO every few years - if ever.  I wold suggest that our "ministerial" process is better than that which our typical client would do.

Second, I'm still not sold that these tasks are "fiduciary" functions.  ERISA's definition requires discretion, or "management" (implied discretion) of plan's administration.  Tightly drawn processes eliminate that discretion in 98% of the situations, and the remaining 2% might go back to the plan sponsor for a decision.  Even so, if you "split" the ministerial part of the task from fiduciary part (discretion), and rigorously apply the process, you've complied with ERISA's "prudent expert" standard - EVEN IF an occasional error occurs.

"About your third paragraph:  Let's imagine a hypothetical situation in which the procedures and methods for doing the specified functions are exactly the same whether the functions are done as a fiduciary or as a non-fiduciary.  Might it be worthwhile to the plan to spend a little extra to buy the economic value of the 3(16) provider's extra responsibility (and so its potential contribution to making good the plan's losses that result from the 3(16)'s direct breach, or from the employer/administrator's breach that the 3(16) failed to prevent or remedy)?"

No.  You are imposing a fiduciary function on another - over which you have very little control, and have a heightened duty to monitor under "co-fiduciary" standards.  I think you haven't "offloaded" a piece of the fiduciary liability pie - as these purveyors of 3(16) services sell you - you've enlarged the entire pie.  In addition, if you've got a good process, and rigorously apply it, I think you've complied with the prudent expert standard, as mentioned above.

With respect to your last paragraph (reproduced above), I think it's all marketing - based on fear.  The problem is, no one asks the right question:  "Do you trust someone else who is selling you a service for profit to do the right thing more than you trust yourself?" 

It's not bad to be a fiduciary - it's just bad to be a bad fiduciary.

I spent a lot of my career educating fiduciaries to be good fiduciaries....

[RatherBeGolfing]

4 minutes ago, MoJo said:

The key is to ensure the process undertaken by the non-fiduciary service provider is appropriate and in my experience, those that do it regularly - like a recordkeeper - have decent processes, and those that don't aren't in business long.

And you can still recover against a non-fiduciary service provider who is at fault. The good ones will own their mistakes and the bad ones, like you say, aren't in business long.  But then again, it wasn't too long ago a "fiduciary" service provider had their offices raided and their files seized as part of a fraud and embezzlement case...

[MoJo]

16 hours ago, RatherBeGolfing said:

...  But then again, it wasn't too long ago a "fiduciary" service provider had their offices raided and their files seized as part of a fraud and embezzlement case...

a "bad" fiduciary....

[Pam Shoup]

My firm does provide Fiduciary Plan Administrator (FPA) services to plans.  We serve as FPA for all of our clients for recordkeeping services.  For compliance, we serve as FPA for about half of our clients, with the other half engaging TPAs for compliance services only or a TPA that will also provide a limited amount of 3(16) services, such as signing the 5500 form.

With that being said, the employer still has the fiduciary liability of hiring us and monitoring our fees.  We will do as much work for the plan as the technology will allow us to do.  On the top end are employers with payroll companies with 360 integration available.  That enables us to pull payroll and census information and push payroll deduction amounts/changes/esclations, loan payment amounts, changes, stops, deferral suspensions for hardships, etc.  As an example, if we pull a termination date from the payroll records, we send the plan and participant specific distribution paperwork to the participant and issue the disbursement, without any action required by the employer.  All distribution and loan requests go through us, we qualify the DROs, gather the documentation and process the hardships.  For those without payroll integration, we do things like track for late deposits at the participant level, ask for data dumps of census data for enrollment/termination/testing purposes, etc.

It takes a lot of custom written software and highly educated staff to perform these fiduciary functions.  In addition to our standard E&O insurance, we also purchase liablity insurance just for the FPA functions.  Our SSAE-16 audit actually contains the FPA control objectives so those pieces are audited too.  It was not easy to find an auditing firm that was able to audit at a FPA level.

We use outside custodians/trust companies so the money does not go through us.  The employer receives regular reports from them and we encourge the employers to review our reports against those produced by the trust company.

Just to sum it up, a lot of firms advertise that they provide 3(16) servies, but in reality, they provide 3(16) assistance and don't really take on the liability that goes with providing those services at the Plan Administrator level.  This can leave the employer thinking that they have turned over the day to day operation of their plan, when they really have not.

To the original question, there are not a lot of us who provide true FPA services.  We work with independent financial advisors and TPAs who like having that FPA piece to back up whatever fiduciary services they are providing to plans.

 

 

[Kac1214]

Mojo - Thank you for your comments and insight. I've explored the 3(16) issue numerous times, including the investment of time and money with an ERISA attorney to explore, develop a process and write a service agreement. However, we continue to conclude that charging more for a service that isn't elevated over and above the level at which we provide our non-3(16) ministerial services is too difficult to justify. Charging more for doing what we already do as a non-fiduciary seems to be a breach unto itself and you stated it more clearly than I've been able to. Thank you