3(16)

[austin3515]

In general, I am pessimistic about the 3(16) business model, but I get that there are aspects of it that appeal to clients.  My question is, do I have the latitude to pick and choose which things I will offer as a 3(16)?  So for example, I think it rather unappealing to clients to take over the deposit process because most clients want to be involved in ACHing funds out of their own operating account.  But I think in general clients LOVE the idea of a TPA signing off on distributions.

Signing a form 5500 - not a big deal since I already prepare a signature ready form.  But responsibility for sending out notices?  Quite appealing.

So the question is, can I have a "3(16)-lite" offering, charge a little bit more for it, and take over those things that are the most value added (emphasis on the word value).

I already understand the concept behind the full suite of services, so no need to sell me on that!

[Peter Gulia]

A carefully written agreement can allocate responsibilities between a § 3(16) service provider and a plan’s administrator (if the administrator knowingly makes such a contract).

 

You’d write the who-does-what so it’s legally sound under the relevant States’ laws of agency and contract and meets the conditions for a valid allocation under ERISA § 405(c).

 

Even if the writing is perfect and legally enforceable, a § 3(16) service provider (if it has enough authority or control to make it a fiduciary) doesn’t escape co-fiduciary responsibility.  ERISA § 405(a), 405(c)(2)(B).  A co-fiduciary if it has knowledge of another fiduciary’s breach is liable for it unless the observing co-fiduciary “makes reasonable efforts under the circumstances to remedy the breach.”  ERISA § 405(a)(3).

 

If your business can accept and manage those and related risks, offering a 3(16) service can be a value-added.  I’d bet you’d be good at it.

[Pam Shoup]

I agree with FGC above.  Most firms pick and choose what services they offer as a 3(16) and there are some employers where a fiduciary lite is all that is needed.  Make sure that your serivce agreement is very clear with what services you are providing as a 3(16) and what you are providing as a TPA.

[Patricia Neal Jensen]

Agree.  The 3(16) can pick and choose, but  the agreements should articulate this very specifically. Fiduciary Guidance lays this out correctly.

FYI, our firm developed such a 3(16) model but terminated it after a couple of years.  We are not a fulfillment house (and do not want to be) and the plan sponsors were altogether too enthusiastic about having us mail out notices etc.   This "product" needed more staffing and training than we were set up to provide.  We could see that we would not make money on this for a few years and decided that we were busy enough with the work we already are set up to do to take a chance on this working out profitably.  Our clients did love it, though.  Our model was very helpful to a plan sponsor with a lot of turnover in the HR and admin areas of its business.

Hope this helps!

 

PNJ

[austin3515]

Pretty much the thought process we are going through!  Major major committment, entirely new operation.  And getting plenty of new business without having to mention it...  But I do like the idea of saying "hey, I can send notices for you and sign off on distributions."

This processing payrolls and getting full census data each pay-period seems like an overreactive fix to a problem that I don't see is out there.

[Bill Presson]

On 9/3/2019 at 3:57 PM, austin3515 said:

Pretty much the thought process we are going through!  Major major committment, entirely new operation.  And getting plenty of new business without having to mention it...  But I do like the idea of saying "hey, I can send notices for you and sign off on distributions."

This processing payrolls and getting full census data each pay-period seems like an overreactive fix to a problem that I don't see is out there.

Austin, what about the corollary to "getting plenty of new business without having to mention it."??

Are you losing any business to a firm doing it? Either in a competitive situation or losing existing clients?

We've debated this for a long time at my existing firm and at my prior firm. I keep thinking it's going to be huge, but it just never seems to really take off.

[austin3515]

2 minutes ago, Bill Presson said:

Are you losing any business to a firm doing it? Either in a competitive situation or losing existing clients?

Nothing.  And I recently spoke to a wholesaler for a large recordkeeper and he told me his region added something like 80 new plans and one took 3(16) services from a TPA.

And I'd venture a guess that that one client is getting "ripped off." 

[Bill Presson]

33 minutes ago, austin3515 said:

Nothing.  And I recently spoke to a wholesaler for a large recordkeeper and he told me his region added something like 80 new plans and one took 3(16) services from a TPA.

And I'd venture a guess that that one client is getting "ripped off." 

Thanks. I'm not opposed to it, but almost everything comes back to the payroll data. If a 3(16) isn't actually doing the payroll and controlling an employer checking account, I don't see how they are relying any less on the assumption and timing of good data than we are.

[austin3515]

Exactly.  To tell you the truth I think that if we could ever find a PEO that would let us do everything related to the admin for our plans, that would be the home run scenario for this stuff.  Because if you're the PEO, you're already running the payroll, the data is yours, etc.  And of course you're not a 316 you're the actual administrator.

Anyway, obviously finding a PEO who would let me do that might be harder then finding the Lost Ark.  And yes PEO's are expensive but there is a clear value proposition there, where I think this 3(16) stuff just does not add enough value to justify the extra fees that they charge.

But that's just me.

[Sue]

We are considering offering 3(16) services to one of our clients (small family owned business with 4 family members and 1 non-family employee).  Can you share with me what sort of fee structure you have used?  We don't know where to begin.  Thanks!

[RatherBeGolfing]

12 minutes ago, Sue said:

We are considering offering 3(16) services to one of our clients (small family owned business with 4 family members and 1 non-family employee).  Can you share with me what sort of fee structure you have used?  We don't know where to begin.  Thanks!

Fee structure is the least of your worries at this point.

Have you looked at what functions you will perform, what your liability is if not performed properly, what additional requirements you will subject yourself to as a co-fiduciary, whether your E&O will cover you at all if you take on fiduciary responsibilities , etc?  That is where you need to begin.

[Sue]

We're looking at all of that now.  We have read several posting and will take opinions into consideration.

[jpod]

I don't know if this has already been said above, but if a third party is going to be hired to be a 3(16), it needs to be understood that the third party needs to act under its discretionary authority and not seek the employer's blessing first.  With that said, the first time the third party takes some action which it believes is appropriate but the employer hates it is likely to get fired.