3(16) Plan Administrator Indemnification

Hello - is anyone familiar with a 3(16) service agreement and what is typical language for indemnification? We are reviewing a contract for a potential 3(16) for our client.  For example, I have seen one agreement refer to the indemnification of fiduciaries in the basic plan document and another one that limits liability to the fees collected from the Employer in the prior 36 months preceding the date of the error, which would equate to a total of $18,000.Thank you for any insight.

In my view, there isn't a stock answer to your question.  Since your client is engaging a 3(16) fiduciary, they have a fiduciary duty to assess the potential risk of loss/costs to the plan that could result from the proposed 3(16) fiduciary's acts (or omissions).  Without seeing the scope of the limitation of liability/indemnification provision or the scope of services they will provide under the agreement, not sure how one would quantify the limitation.  I mean the agreement must be reviewed to determine what is the possibility of, and the maximum amount of, any potential loss for the plan based on the services provided and, perhaps, if these potential losses were to arise, what could be the additional administrative or other costs for any actions your client may have to take to mitigate/minimize the potential losses?  (Editorializing here but honestly, many agreements that purport to be 3(16) agreements don't even provide the third-party being retained enough discretion to, and/or require any services that would, cause them to be fiduciaries).

That said, the bulk of our clients are plan sponsors.  We frankly invariably strike all this limitation language and advise our client to tell the proposed providers that they should ensure they have good enough E&O insurance to cover their negligence (and indemnity to us) and that they must provide the client with documentation indicating that they have an ERISA 412 bond that covers them separately with regard to their fiduciary acts involving the client's specific plan or one that covers theirs and the client's actions under the plan both but separately (i.e., with separate $ limits).  Our clients generally stick with this and don't sign providers who will not "step up" if they are at fault.

On the other hand, when we advise clients that are TPAs regarding limitations/indemnities, the form contract generally includes 1-year fee limits.  These TPAs, though, generally charge much higher service fees (basis points type fees) than what your proposed provider is charging.  Also, as with most indemnity provisions, this amount is almost always the subject of heavy negotiations and does not remain static... the agreed upon limits range from elimination of the limit to a multi-year limit to sticking with the original 1-year fee limit (here, the ultimate limitation depends on the scope of the work and the fees generated under the contract... how much do they want the business).   

Without remarking on what is or isn’t typical or what a service recipient might demand or tolerate (or what a service provider might insist on or negotiate):

To evaluate an indemnity provision or a limitation-of-liability provision, distinguish whether the provision applies:

between the 3(16) fiduciary and the plan;

between the 3(16) fiduciary and the plan’s administrator (personally, not as the plan’s fiduciary);

between the 3(16) fiduciary and the employer.

Each of those can result in different law about what’s void or otherwise legally ineffective, and what might be legally enforceable.

If the plan is governed by ERISA’s fiduciary-responsibility provisions, consider ERISA § 410 [29 U.S.C. § 1110] https://uscode.house.gov/view.xhtml?req=(title:29%20section:1110%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1110)&f=treesort&edition=prelim&num=0&jumpTo=true.

A plan may exonerate or reimburse a fiduciary for its prudently incurred expenses if the fiduciary did not breach its responsibility.

The plan (or a use of the plan’s assets) can’t relieve a fiduciary, including a 3(16) administrator if it is a fiduciary, from its responsibility or liability to the plan.

ERISA § 410(a) does not preclude a person other than the plan or its trust from indemnifying a plan fiduciary, as long as that other person uses personal resources rather than the plan’s assets.

A court might not enforce an indemnity provision if it has the effect of setting up an incentive for a fiduciary not to perform the fiduciary’s responsibility.

Consider Artie M’s suggestion that a service recipient ought to expect a service provider to stand behind its services. That’s so even if the service provider is a mere contractor, and ought to be especially so if the service provider also is a fiduciary.

Over the past 41 years, I’ve done all sides of these negotiations. And with many layers of bargaining power.

Remember, an indemnity obligation is only as good as the financial capacity and honesty of the obligor.

This is not advice to anyone.

Thank you both very much! This is helpful.