3(16) Services as a TPA

[mjf06241972]

Trying to get people's opinion of if it makes sense to add 3(16) services as a TPA.  I would assume it is an add on service and not required (more of a convenience for the client.)  I am a small TPA about 180 clients right now and not sure if it makes sense or is a way to prepare for the possible open mep legislation.  Is there certification to become 3(16) authorized and how are people billing clients for this, are a couple of my questions.  

Any input would be greatly appreciated.

[Larry Starr]

I've looked at it; in my view it's nothing but a gimmick and there's no reason for it in our practice.

[ratherbereading]

We added this service last year for a few of our clients and it's working out well. Especially for those clients who ignore our repeated requests for census and other information-

[MoJo]

I think it all boils down to what you mean by 3(16) services.  Everyone has a different definition of it.  In many cases, service providers (recordkeepers, TPAs, etc.) already s"do" many of hte things 3(16) fiduciaries tout - but do so in a ministerial fashion.  We handle hardships, loans, distributions, QDROs cash-outs, rollovers in and a bunch of other stuff - without (I hope) becoming a fiduciary.  We don't do "payroll" and related components, not do we "sign" the 5500, not select other service providers, but....

[Pam Shoup]

There are a couple of threads on this issue so you may want to refer to them.  There is not a certification per se to become a 3(16), but at a minimum, you should have most of your staff with industry credentials.  Having CPAs, E.A.s or ERPAs will also make a difference if you want to actually file the 5500 forms.  Some things to look into:

1. Education and knowledge of your staff to not only perform 3(16), but to also educate clients and to spot anything that could be an issue. 

2.  Fiduciary insurance coverage for your 3(16) services and thorough knowledge of what you will need to do in case of a possible breach of your 3(16) duties.

3.  Very clear knowlege of what services you will and will not be performing as a 3(16).  Your Administrative Services Agreement should reflect your exact services.  You should also look to see if your current plan document provider will allow you to be named as  Plan Administrator in the document/5500 so that the IRS will notify you if they are making an inquiry.

4.  Very explicit policies and procedures for you and your staff to follow.  Depending upon your service model, you may want to look into getting a SOC 1 - SSAE18 audit or a CEFEX certification.

 

 

 

[Larry Starr]

11 hours ago, ratherbereading said:

We added this service last year for a few of our clients and it's working out well. Especially for those clients who ignore our repeated requests for census and other information-

I have a different take; a client who ignores our requests (especially REPEATED requests), gets fired.

[Pam Shoup]

21 hours ago, Larry Starr said:

I have a different take; a client who ignores our requests (especially REPEATED requests), gets fired.

 

Because we are a fiduciary to the plan, we fired the client, and we notified the DOL.  The plan was assigned to a DOL Investigator rather quickly.

[RatherBeGolfing]

18 hours ago, Pam Shoup said:

and we notified the DOL

that pesky "co-fiduciary" thing that people forget when they toss around the idea of 3(16) to "make things easier for the client"

[MoJo]

5 minutes ago, RatherBeGolfing said:

that pesky "co-fiduciary" thing that people forget when they toss around the idea of 3(16) to "make things easier for the client"

I regret that I may give but one "like" to this....

[Luke Bailey]

There's definitely a potentially large fiduciary liability exposure if a TPA is a 3(16) administrator, for both the client and the TPA. The TPA needs to be compensated. I advise clients it's not a lot of protection for them unless they know that the TPA has adequate coverage.

[Larry Starr]

7 hours ago, RatherBeGolfing said:

that pesky "co-fiduciary" thing that people forget when they toss around the idea of 3(16) to "make things easier for the client"

Exactly; I wonder if the client understood that would be your role. Do you think the client was happy with that result? At least I can fire the client and don't have to call the Calvary, and I think if I did do that once or twice, our reputation in the advisor industry would quickly blow up on us!

[Pam Shoup]

 

We actually engaged the advisor in the whole process and he found the employer to be equally non-responsive.  We emailed, he emailed, we called, he called, we sent letters certified mail, he sent letters.  We told the client that we would need to notify the DOL, they didn't care.  We conferred with the rep (who was working as a 3(21) so he was a co-fiduciary also) and he agreed with us that we had to resign and notify the DOL and he also resigned from the plan.  At this point in time, I can't worry about what the employer thinks.  As a fiduciary, it is my job to act in the best interest of the plan participants.  

 

 

[Larry Starr]

38 minutes ago, Pam Shoup said:

 

We actually engaged the advisor in the whole process and he found the employer to be equally non-responsive.  We emailed, he emailed, we called, he called, we sent letters certified mail, he sent letters.  We told the client that we would need to notify the DOL, they didn't care.  We conferred with the rep (who was working as a 3(21) so he was a co-fiduciary also) and he agreed with us that we had to resign and notify the DOL and he also resigned from the plan.  At this point in time, I can't worry about what the employer thinks.  As a fiduciary, it is my job to act in the best interest of the plan participants.  

 

 

Of course it does; but that's because you took on that role.  My advice to anyone is to avoid that role.  If this was our client, we would have sent a sign off letter and had no further responsibility.  My concern is, if someone takes on that responsibility, does your client (who is paying you) understand that you are now a policeman who will turn him in to the authorities if he does wrong?  That's the discussion that needs to be had with clients, and I would venture small business clients will NOT appreciate that, especially since being a fiduciary is something that is NOT really all that difficult and really does little to make the client's life easier (at least in my VHO!).

[Pam Shoup]

On 11/8/2019 at 4:46 PM, Larry Starr said:

Of course it does; but that's because you took on that role.  My advice to anyone is to avoid that role.  If this was our client, we would have sent a sign off letter and had no further responsibility.  My concern is, if someone takes on that responsibility, does your client (who is paying you) understand that you are now a policeman who will turn him in to the authorities if he does wrong?  That's the discussion that needs to be had with clients, and I would venture small business clients will NOT appreciate that, especially since being a fiduciary is something that is NOT really all that difficult and really does little to make the client's life easier (at least in my VHO!).

Yes, the clients are made aware of our role.  Most of our clients do not want any responsibility for running the plan, including pulling down payroll, census and wage data on a payroll, monthly or annual basis so we do that for them.  We also explain to them that no matter what, they are a fiduciary by virtue of the fact that chose us to service their plan.  We are usually paid from the plan assets and not from the employer so our client is the plan and our responsibility is to the plan participants.  Where we have issues is those clients who don't want us to pull down the information and it is like pulling teeth to get data.  Fortunately, most of our clients are very hands off when it comes to the plan and have all of their particpants contact us for everything.  The independent financial advisor (3(21) or (3(38)) assists or chooses the funds and conducts the enrollment meetings, to the extent they are not auto enrolled.

I suspect that we attract a very different set of clients.  We just happen to work with a lot of employers that want a plan, as long as they don't have to do anything to take care of it.  We are the recordkeeper for all of our plans and we perform compliance services for about half of them, with the other half serviced by outside firms for their TPA work and have various levels of 3(16) compliance services provided by the TPA, depending upon the firm.

It's a lot of responsibility, but I have a lot of custom written software and educated staff to do the work.  I can't imagine trying to use any of the industry off the shelf software to try to perform 3(16) services.