3(21) and 3(38) fiduciary services

[Bird]

Is it just me or is this the most over-hyped "thing" in the last 5 to 10 years?  I can't have a conversation with a recordkeeper or advisor without someone blurting out "3(21) and 3(38)" (and usually having no idea what they are saying).

It seems that any real protection is from participant lawsuits - in the small plan market, that is simply not a threat.  Is the DOL going after anyone for having "bad" investments? 

And...I know these services are inexpensive or "free" but it seems to me that to the extent there are costs, they are borne by the participants, but trustees and advisors are the ones being protected.  How wrong is that?!

[Mr Bagwell]

Mr Bird,

I have had those same thoughts in regards to the 3(21) and 3(38).  I would say they have their place, but the concept of the protection is generally a scare tactic to try to win some plans.

I liken it to a Seinfeld episode where Puddy is selling Jerry a new car and Jerry asks about undercoating.  Puddy responds by saying "we don't even know what that is".

[Madison71]

...also don't forget 3(16)...the TPA is now the Plan Administrator - although often limited to certain services and not designated in the Plan document.  There can be real value to it, but some of the agreements I've read have no teeth to them.

[MoJo]

Dare I say it - "co-fiduciary" liability.  Many 3(38)s and 3(21)s are certainly legit and can add value in an areas many plan sponsors are not experts on - but with respect to 3(21)'s - one forgets to infomr the plan sponsor that instead of "transferring" your liability to the 3(16), you are assuming the responsibility of prudent selection and monitoring - without the "control.

And in many cases, service providers can provide the same services as a 3(16) without being a fiduciary (albeit with plan fiduciary input) at the same or lower cost.  We do QDROs, loans, hardships, in-service, termination distributions, provide document services, offer an "in-house" 3(21) and an external 3(38) and a variety of things.  We don't "sign" the Form 5500 - but we provide clients with everything they need to review, verify and "push the button."

[david rigby]

5 hours ago, Bird said:

Is the DOL going after anyone for having "bad" investments? 

IMHO, it's not about the DOL, it's about the courts.  But maybe that's just me.

[Pam Shoup]

7 hours ago, Bird said:

Is the DOL going after anyone for having "bad" investments? 

We do a lot of contract work with the DOL in the abandoned plans program, or where they filed lawsuits and obtained a judgment to remove the trustees from the plan.  Most of these are very small plans that other than a quick press release, you don't hear much about.  In our experience, the DOL is NOT going after plans for bad investments.  However, they are going after plans for operational violations.

With that being said, there is a market for REAL 3(16) services where the provider is an actual named Plan Administrator in the document and takes on the fiduciary liability and responsibility for the running of the plan.  As a firm that made the move to PA services, I can tell you that it is more cost effective for us to process everything correctly, in real time, than it is to go back after the year has ended and try to fix mistakes caused by an employer approving a transaction that was contrary to a plan document.  We also don't have to wait around for employer signatures and take 5 phone calls from an impatient participant who wants their money. 

 

[MoJo]

35 minutes ago, PamB said:

We do a lot of contract work with the DOL in the abandoned plans program, or where they filed lawsuits and obtained a judgment to remove the trustees from the plan.  Most of these are very small plans that other than a quick press release, you don't hear much about.  In our experience, the DOL is NOT going after plans for bad investments.  However, they are going after plans for operational violations.

With that being said, there is a market for REAL 3(16) services where the provider is an actual named Plan Administrator in the document and takes on the fiduciary liability and responsibility for the running of the plan.  As a firm that made the move to PA services, I can tell you that it is more cost effective for us to process everything correctly, in real time, than it is to go back after the year has ended and try to fix mistakes caused by an employer approving a transaction that was contrary to a plan document.  We also don't have to wait around for employer signatures and take 5 phone calls from an impatient participant who wants their money. 

 

Pam:  In the scenario you describe (abandoned plans or "removed" fiduciaries) I agree with you - but with "routine" admin, can you explain why the 3(16) is more efficient than non-fiduciary outsourcing of that stuff?  We do distributions (all kinds) mandatory cash-out processing, DRO review and "Q"DRO-ing, loans, and a whole lot of other stuff without being a fiduciary, and without obtain a plan sponsor/fiduciary signature on anything (except the initial authorization to do so) - unless there is an issue.  We try (mostly successfully) to not let those mistakes happen that next year will need correcting.

I'm not knocking your business model - but I have yet to see a 3(16) tell me why a "fiduciary" is necessary for the 95% of the stuff we do as a non-fiduciary.

[RatherBeGolfing]

4 minutes ago, MoJo said:

I'm not knocking your business model - but I have yet to see a 3(16) tell me why a "fiduciary" is necessary for the 95% of the stuff we do as a non-fiduciary.

But they sure can find a way to charge for it...

[Bird]

18 hours ago, david rigby said:

IMHO, it's not about the DOL, it's about the courts.  But maybe that's just me.

That's my point.  The ones selling these blurt out "DOL" like...everyone knows they are evaluating fund lineups or something.

[Earl]

And I have spent a lot of time educating DOL regulators on how Mutual Funds actually work (how the cash flow works through the various parties.)  They couldn't evaluate their way out of a paper bag.

The fees for ancillary services being charged to the Participant are the big issue, as I see it.

[QP_Guy]

23 hours ago, david rigby said:

IMHO, it's not about the DOL, it's about the courts.  But maybe that's just me.

IMHO it's only about the DOL.   Commissioned business has a different burden than before, and the BDs are driving RKers to provide fiduciary solutions.  That's because retirement business, and  commissioned business in particular, is very very hard to supervise.  So the BD requires outsourced fiduciary or documented fiduciary services to meet the financial institutions' DOL burden of "establishing fiduciary policies".

[Pam Shoup]

20 hours ago, MoJo said:

Pam:  In the scenario you describe (abandoned plans or "removed" fiduciaries) I agree with you - but with "routine" admin, can you explain why the 3(16) is more efficient than non-fiduciary outsourcing of that stuff?  We do distributions (all kinds) mandatory cash-out processing, DRO review and "Q"DRO-ing, loans, and a whole lot of other stuff without being a fiduciary, and without obtain a plan sponsor/fiduciary signature on anything (except the initial authorization to do so) - unless there is an issue.  We try (mostly successfully) to not let those mistakes happen that next year will need correcting.

I'm not knocking your business model - but I have yet to see a 3(16) tell me why a "fiduciary" is necessary for the 95% of the stuff we do as a non-fiduciary.

We don't even need the inital authorization from the employer.  Let me give you a scenario . . .  an employee terminates and the employer enters the term date into their payroll provider's system.  The employer is then done as far as the retirement plan goes.  We go into the payroll provider's system, pull down the census data, notate the terminee, send the distribution paperwork to the terminee and process the distribution.  

For a loan, an employee submits the loan request, we do the paperwork, we push to the payroll provider to start the loan deduction, we track the payments and then re-push to the payroll provider the final payroll deduction amount.  No employer involvement.

(Under current law), we track the hardship suspension dates and report to the payroll provider when to stop and when to start back up to again.

For enrollments, we pull the census data, determine new eligibles and send out the enrollment materials.

We issue all SOX notices, create the 404a-5 notices annually, issue the safe habor and auto enroll notices, etc.

We maintain copies of plan documents, issue the SPDs, etc. 

The employees log onto our website/vru and call into our call center to initiate transactions and to ask questions.  The employer is instructed that if employees come to them with questions, to re-direct them to us.

Basically, the employer needs to do almost nothing to maintain the plan.  We can push and pull all of the data from their payroll providers (and we have 180 and 360 integration with many different ones), and their independent reps conduct the enrollments.  

 

 

[Pam Shoup]

20 hours ago, RatherBeGolfing said:

But they sure can find a way to charge for it...

 . . . . . unless we don't charge any more for 3(16) services than those providers who don't offer those service . . . . 

[MoJo]

1 hour ago, PamB said:

Let me give you a scenario . . .  an employee terminates and the employer enters the term date into their payroll provider's system.  The employer is then done as far as the retirement plan goes.  We go into the payroll provider's system, pull down the census data, notate the terminee, send the distribution paperwork to the terminee and process the

We do the same thing.

1 hour ago, PamB said:

For a loan, an employee submits the loan request, we do the paperwork, we push to the payroll provider to start the loan deduction, we track the payments and then re-push to the payroll provider the final payroll deduction amount.  No employer involvement.

We do the same thing.

1 hour ago, PamB said:

(Under current law), we track the hardship suspension dates and report to the payroll provider when to stop and when to start back up to again.

We do the same thing.

 

1 hour ago, PamB said:

For enrollments, we pull the census data, determine new eligibles and send out the enrollment materials

We do the same thing.

 

1 hour ago, PamB said:

We issue all SOX notices, create the 404a-5 notices annually, issue the safe habor and auto enroll notices, etc.

We do the same thing.

1 hour ago, PamB said:

We maintain copies of plan documents, issue the SPDs, etc.

We do the same thing.

1 hour ago, PamB said:

The employees log onto our website/vru and call into our call center to initiate transactions and to ask questions.  The employer is instructed that if employees come to them with questions, to re-direct them to us.

We do the same thing.

1 hour ago, PamB said:

Basically, the employer needs to do almost nothing to maintain the plan.  We can push and pull all of the data from their payroll providers (and we have 180 and 360 integration with many different ones), and their independent reps conduct the enrollments.  

We do the same thing.

And when I say the only thing we need from the employer is the "initial authorization" - that is basically the same as the contract your clients sign for you to provide the services.  It's a one time, at the beginning of the relationship document that authorizes us to do these things on their behalf pursuant to the various "policies" that often are part of hte plan documents (that we also provide) - i.e. the "loan policy," the "hardship policy", the QDRO policy."

The only difference is we call it the standard offerings of a "bundled service provider" and you call it 3(16) services.

My question still stands....

[jashendorf]

Mojo -

I'm not speaking of your company specifically, but more than a few companies that claim to do "nonfiduciary administration" (for lack of a better term) are, in fact, performing fiduciary functions notwithstanding what they say in their agreements. In other words, just because they say they're not fiduciaries doesn't mean that they're not fiduciaries. I'm sure that, without trying too hard, I could find a client who had to get rid of a TPA that was doing essentially what PamB describes, but under an agreement that screams "We are not a fiduciary."

[Pam Shoup]

1 hour ago, MoJo said:

We do the same thing.

We do the same thing.

We do the same thing.

 

We do the same thing.

 

We do the same thing.

We do the same thing.

We do the same thing.

We do the same thing.

And when I say the only thing we need from the employer is the "initial authorization" - that is basically the same as the contract your clients sign for you to provide the services.  It's a one time, at the beginning of the relationship document that authorizes us to do these things on their behalf pursuant to the various "policies" that often are part of hte plan documents (that we also provide) - i.e. the "loan policy," the "hardship policy", the QDRO policy."

The only difference is we call it the standard offerings of a "bundled service provider" and you call it 3(16) services.

My question still stands....

So how are  you NOT a fiduciary?

[MoJo]

3 minutes ago, PamB said:

So how are  you NOT a fiduciary?

No discretion is involved.  We adhere strictly to predetermined criteria (the "policies") and function in a ministerial manner.  Nothing you listed requires "discretion" to complete.

Once in a great while, the employer *may* have to get involved - but generally isn't required.  The only case I can recall last year involved a hardship for medical expenses where the supporting documentation (the invoices) were all marked "paid."  That, under our system causes a reject - and while we worked with the participant to "trace" funds to determine if the "payments" would make the cut (with an uncooperative participant), the employer stepped in and "ruled" it to be a hardship.  The participant also was an exec (and an HCE) at the company - so they did so against our advice.

But that's the only instance for the entire year where an employer got involved in any of our outsourced services - and we currently have about 5500 plans.  Can't say how many of them use our outsourced services (it's an ala carte menu they can select from) I can assure you ALL of them use loan outsourcing (if they have loans) and most for distribution outsourcing (including in-service of all types).  Over 500 engage us for QDRO services.  About 5200 of them use our volume submitter document(s).  Payroll, census collection, all of that is 360 integrated.

I hate to tell you this, but I've worked for a number of service providers in my 30+ year career, and even as far back as the early 2000's most of this suite of services have been available - without anyone every saying "3(16)." 

[Pam Shoup]

On 2/23/2018 at 4:28 PM, MoJo said:

No discretion is involved.  We adhere strictly to predetermined criteria (the "policies") and function in a ministerial manner.  Nothing you listed requires "discretion" to complete.

Once in a great while, the employer *may* have to get involved - but generally isn't required.  The only case I can recall last year involved a hardship for medical expenses where the supporting documentation (the invoices) were all marked "paid."  That, under our system causes a reject - and while we worked with the participant to "trace" funds to determine if the "payments" would make the cut (with an uncooperative participant), the employer stepped in and "ruled" it to be a hardship.  The participant also was an exec (and an HCE) at the company - so they did so against our advice.

But that's the only instance for the entire year where an employer got involved in any of our outsourced services - and we currently have about 5500 plans.  Can't say how many of them use our outsourced services (it's an ala carte menu they can select from) I can assure you ALL of them use loan outsourcing (if they have loans) and most for distribution outsourcing (including in-service of all types).  Over 500 engage us for QDRO services.  About 5200 of them use our volume submitter document(s).  Payroll, census collection, all of that is 360 integrated.

I hate to tell you this, but I've worked for a number of service providers in my 30+ year career, and even as far back as the early 2000's most of this suite of services have been available - without anyone every saying "3(16)." 

I guess that we can agree to disagree.  In your example above, we always have the discretion to approve the hardships so the employer would never have been involved.  100% of our clients engage us for PA functions so all of our services are provided knowing that fiduciary responsibility and liability.

I sure don't miss the pre-internet days where it was a lot harder to communicate with others in our industry!

 

[MoJo]

1 hour ago, PamB said:

I sure don't miss the pre-internet days where it was a lot harder to communicate with others in our industry!

 

True.  I mean we don't even have to talk to people anymore!  (just kidding).  It has made researching and sharing of ideas so much easier.  If we could only solve the problem of (conflicting) information overload......

[TPApril]

This is a very uninformed question:

When plans are offered 3(21) fiduciary services, are they always set up by default as 404(c) plans?

Another uninformed question:

Do 3(21) fiduciary services come with a Trust Agreement? Or would this still be prepared by Document provider?