What is a 3(16) Fiduciary for 401(k) Plans?
posted by Fisher 401(k) June 28, 2019
A 3(16) fiduciary is a service provider hired by an employer to manage the day-to-day administrative work for a 401(k) plan. For many employers, the demands of 401(k) plan administration are a lot to handle. From filing paperwork with government agencies to ongoing communications between employees and service providers, 401(k) plans need ongoing support to stay compliant with the law. For that reason, many employers choose to enlist the help of a 3(16) fiduciary partner to act as a plan administrator and handle some or all of the administrative work of a plan.
What does “3(16) fiduciary” mean?
The retirement industry has adopted the label “3(16) fiduciary” to describe 401(k) service providers who agree to take on fiduciary liability for administrative duties. This includes loan and distribution approval, and some 3(16) fiduciaries even handle signing and filing the annual form 5500 required of many 401(k) plans.1 Section 3(16) of the Employee Retirement Income Security Act of 1974 (ERISA) defines the term administrator.
3(16) fiduciary service providers
Any 401(k) service provider that elects to offer fiduciary administrative services can be labeled a 3(16) fiduciary. Many employers may believe they are receiving this level of service from their 401(k) service providers, but that is not necessarily the case. Employers commonly hire partners like recordkeepers and third party administrators (TPAs) to take on much of the work of a plan administrator, though often it is a TPA that offers 3(16) fiduciary services. There are hundreds of duties associated with 401(k) plan administration, and not all 3(16) fiduciaries offer the exact same mix of services. Employers must be certain they understand which administrative services their 3(16) fiduciary service provider is offering, and which duties fall outside that partner’s work.
What services does a 3(16) fiduciary offer?
When an employer outsources “plan administrator” duties to a 3(16) fiduciary, that partner will actively manage the day-to-day duties of a 401(k) plan, including (but not limited to):
• Determining employee eligibility
• Providing disclosures to employees and other participants
• Providing statements to employees and other participants
• Fixing errors in the plan leading to compliance test, nondiscrimination test, and ADP/ACP test failure
• Signing and filing annual 5500 forms (as required)
• Approving and processing loans and distributions
Note that not all 3(16) fiduciary partners will handle 100% of these duties. Employers may retain some of the duties of a plan administrator, or may choose to delegate some or all of them to an employee, like an HR manager.
If I work with a 3(16) fiduciary, am I free of liability?
Different 3(16) fiduciaries offer different services. While some “full” 3(16) fiduciary services providers will take on your legal responsibility for the ongoing administration of the plan, the employer still monitors the work of their chosen partner, and periodically reviews their fees to see that they are reasonable compared to the level of service received.
As noted above, some plan administrators will only take on certain duties, leaving others to the employer to manage or outsource to another partner. With every plan administrator you work with, whether internal or external, keep close track of what duties they are taking on, and which still need your attention.
Additionally, a 3(16) fiduciary’s services do not extend to investment management. ERISA does outline investment-based roles associated with a 401(k) plan, which are commonly referred to as 3(21) and 3(38) fiduciaries.
Find the Fiduciary Help You Need
From day-to-day plan administration to investment management, there are several fiduciary options for employers looking for help with their 401(k) plan. Think about the specific help you need to make your life easier and look for service providers who clearly identify themselves with labels like 3(16) fiduciary. If you’re looking to customize a 401(k) plan that meets your business goals with the help of the right fiduciary partners, contact Fisher Investments today—we serve as a 3(38) investment manager and can help you build an attractive 401(k) plan complete with the fiduciary support you need.