1. Customized Service Models for 3(16) Fiduciaries
Marcia S. Wagner, Esq.

2. Business Need for 3(16) Fiduciaries Legal Definition
Agenda
Business Need for 3(16) Fiduciaries
Legal Definition
Risks of Serving as 3(16) Fiduciary
Types of 3(16) Fiduciary Services
Limits on Employer’s Ability to Transfer Duties
Best Practices
Today’s presentation is going to include an in-depth discussion of 3(16) fiduciaries and their various service models. It should be valuable for those of you who are already offering theses types of services. And it should also provide helpful insight to those who are exploring the possibility of serving as a 3(16) fiduciary. First, we will talk about the business need and the substantial client interest in 3(16) fiduciaries. Then, we will discuss the legal definition, or what it means, exactly, for a third party firm to serve as a 3(16) fiduciary. We will also be discussing the potential risks associated with serving in a fiduciary capacity, and how you can mitigate this risk.
We will also address the various types of 3(16) services that may be offered by a firm to its plan clients. Our presentation will cover a number of key considerations that you should take into account when selecting your suite of 3(16) fiduciary services for purposes of customizing your firm’s service model. Lastly, we will talk about the suggested best practices for TPA firms that are actually decide to serve as 3(16) fiduciaries.

3. Business Need for 3(16) Fiduciaries
Challenging Consequences of ERISA
Imposes high standard of care on fiduciary advisors
Same high standard imposed on plan sponsors
Many sponsors do not understand plan administration or ERISA requirements
Currently rely on non-fiduciary providers
Fiduciary risk for oversight failures
We’ll talk more about what 3(16) fiduciaries do, but in short, they provide valuable administrative and fiduciary oversight services to plan sponsors. There is a real business need in the marketplace for 3(16) fiduciaries, and this need arises because of the fiduciary requirements of ERISA, which is the regulatory framework that governs the operation of tax qualified retirement plans sponsored by employers. As you all know, ERISA imposes a high standard of care on professional service firms that hold themselves out as fiduciary advisors to their plan clients. For better or for worse, this same high standard of care for professional advisors, also applies to any and all employers sponsoring a retirement plan. Complying with the fiduciary standards of ERISA may not be a problem if you are a large corporation with a department of experienced HR professionals, but it can be rather challenging for small employers, such as a local bakery or a beauty salon with just a handful of employees. Many plan sponsors have established plans without fully understanding how their plans are supposed to operate or how they are supposed to comply with the requirements of ERISA. By virtue of their position, plan sponsors are fiduciaries under ERISA, and if a plan sponsor fails to oversee the plan properly or otherwise fails to meet its fiduciary obligations, the plan sponsor is at fiduciary risk and subject to potential liability under ERISA.

4. Plan Sponsor’s Advantage in Hiring 3(16) Fiduciary
“Outsourcing” of 3(16) Duties and Related Risks
Plan sponsor formally designates third party as 3(16) Fiduciary
Key 3(16) duties for reporting and disclosure are transferred
Other fiduciary oversight responsibilities may be delegated
Fiduciary duty (and related fiduciary risk) transferred to third party
There is a solution that is available, of course, to employers who do not want to be saddled with all of the ERISA responsibilities commonly associated with sponsoring a plan under ERISA. Plan sponsors can simply hire a 3(16) fiduciary and then “outsource” many of these fiduciaries duties to a third party that is willing to serve in a 3(16) fiduciary capacity for the plan. There are certain key duties that only a 3(16) fiduciary may fulfill concerning regulatory reporting and participant disclosure requirements. We’ll be talking about those in a moment, but when you hire a 3(16) fiduciary, at a minimum these fiduciary duties need to be transferred from the plan sponsor to the third party firm. In addition, many 3(16) fiduciaries are willing to accept other fiduciary oversight responsibilities as part of their engagement. Accordingly, it is common for plan sponsors to delegate a substantial amount of their fiduciary duties to 3(16) fiduciaries. By transferring these duties, plan sponsors are able to transfer the headaches and the related fiduciary risks associated with discharging these duties. This transfer of fiduciary responsibility and liability from the plan sponsor to a third party is a meaningful and a compelling value proposition. There are some clear benefits for the plan sponsor from a fiduciary perspective. For this reason, there is a real business opportunity for those TPA firms that are willing to serve as a plan’s 3(16) fiduciary.

5. What is a 3(16) Fiduciary? Business Definition Observations
Third party that takes on substantial plan management responsibilities
Employers traditionally retained these duties
Observations
Business definition refers to a mix of 2 legal roles: Administrator as defined in ERISA Section 3(16) Named Fiduciary
Legal definition varies from business definition
Scope of third party’s role can vary considerably
So let’s talk about what a 3(16) fiduciary is. In a business context, when plan sponsors talk about hiring a quote-unquote “3(16) fiduciary”, they are talking about hiring a third party that is willing to assume and take substantial plan management responsibilities away from the plan sponsor. In the absence of hiring a 3(16) fiduciary, these responsibilities have traditionally been retained by the plan sponsor. Now I just want to take a moment to make a couple of important observations. This business definition of a 3(16) fiduciary is actually mixing up to 2 different legal concepts which are strictly defined under ERISA, the role of a quote-unquote “Administrator” and the role of a quote-unquote “Named Fiduciary.” As a legal matter, the “Administrator” term is actually the one that is defined under Section 3(16) of ERISA. Thus, the business definition of a 3(16) fiduciary is more expansive than the “Administrator” definition found under Section 3(16). The fact that there is a bit of disconnect between the 3(16) legal definition and the business definition can lead to misunderstandings and unintended legal consequences. In fact, misunderstandings are a serious issue in this area, because the scope of the roles of third parties calling themselves 3(16) fiduciaries can vary considerably.

6. Legal Definition of 3(16) Administrator
“Administrator” Defined in Section 3(16)
Special fiduciary designated in plan document
Employer is plan’s 3(16) Administrator by default
Has ERISA reporting and disclosure duties
Does not refer to traditional TPA firms providing non-fiduciary services
The term “3(16) Fiduciary” is a reference to Section 3(16) of ERISA. As I previously mentioned, Section 3(16) of ERISA actually describes a special kind of Plan fiduciary that is plainly referred to as the “Administrator” of a Plan. ERISA Section 3(16) provides that the Administrator is “the person specifically so designated by the terms of” the Plan’s governing document. Every Plan must have a person which serves as its Administrator for ERISA purposes, and if no person is designated, the employer is automatically deemed to be the Administrator. A 3(16) Administrator has particular reporting and disclosure responsibilities under ERISA. For purposes of today’s discussion, when I mention a 3(16) Fiduciary, I will be referring to the business definition of a third party hired to assume plan management responsibilities. And when I refer to a 3(16) Administrator, I will be referring to the legal definition under ERISA. And just to make sure we are all on the same page, I just want to clarify that a 3(16) Administrator as defined under ERISA should never be confused with administrative service providers. Thus, this statutory term should not be used to describe a TPA firm which does not accept any fiduciary responsibility from the Plan sponsor.

7. Reporting and Disclosure Duties of 3(16) Administrator
Special Duties Imposed on 3(16) Administrator
Provide SPDs
Provide Benefit Statements
Provide 404a-5 Participant Disclosures
Provide Plan Document (upon request)
Sign and File Form 5500
Arrange for Plan’s Financial Audit (as necessary)
 A Plan’s 3(16) Administrator has certain reporting and disclosure obligations under ERISA which are not imposed on other types of Plan fiduciaries. It is these reporting and disclosure responsibilities that make the fiduciary role of a 3(16) Administrator unique under ERISA. For example, the 3(16) Administrator has a duty to provide summary plan descriptions (“SPDs”) to participants. It is also the responsibility of the 3(16) Administrator to ensure that Plan participants receive quarterly benefit statements. Similarly, the 3(16) Administrator must furnish participant-level fee disclosures or “404a-5 Disclosures” on a quarterly and annual basis in accordance with U.S> Department of Labor regulations. A copy of the Plan document must also be provided by the 3(16) Administrator to participants upon request. The 3(16) Administrator also has a duty to sign and file the Plan’s annual information return on the Form 5500, and it must engage an accountant to conduct audits of the Plan’s financial statements as may be necessary for these annual filings. As you can see, a 3(16) Administrator has a very specific set of fiduciary duties as prescribed by ERISA.

8. Legal Definition of Named Fiduciary
Named in plan document
Employer traditionally serves in this role
Powers of Named Fiduciary
Managing investment menu
Administration of plan
Engaging service providers
3(16) Fiduciaries routinely assume many of the duties and powers of a Named Fiduciary, in addition to serving as a 3(16) Administrator. The Named Fiduciary of a plan is the fiduciary with the quote-unquote “authority to control and manage the operation and administration” of the plan. As a practical matter, the plan’s Named Fiduciary is the person with ultimate authority over the operation of the plan and its investments. In other words, it generally has the fiduciary authority to make any and all benefits-related and investment-related decisions on behalf of the plan. For example, the Named Fiduciary would generally be responsible for: 
Establishing and maintaining the plan’s menu of investment options;
Ensuring that the plan is administered in accordance with its terms and ERISA; and
Engaging service providers to assist the employer with respect to the plan’s operation, and maintaining fiduciary oversight with respect to such providers.

9. Employer’s Traditional Role
Serves as 3(16) Fiduciary
Plan document designates employer as 3(16) Administrator
Participant disclosures prepared by plan’s TPA, but employer retains ultimate responsibility
TPA prepares Form 5500 and employer reviews/signs
Employer must arrange for audit (for large plans only)
In the absence of a third party serving as a 3(16) Fiduciary, Plan documents have traditionally designated the employer as the 3(16) Administrator. Thus, as the 3(16) Administrator, the plan sponsor has the fiduciary responsibility of ensuring that the Plan participants receive their mandatory disclosures, even if as a practical matter it relies on the Plan’s Recordkeeper or TPA to deliver these materials. For example, even if the TPA prepares and mails the Plan’s SPD to all newly eligible employees under the Plan, it is the employer who remains ultimately responsible for their preparation and delivery to participants as the 3(16) Administrator. Thus, the employer has a fiduciary obligation to oversee the TPA’s work and to ensure that all materials are properly prepared and actually received by participants. Similarly, even if the Plan’s TPA prepares the Form 5500, it is the Plan sponsor in its capacity as the 3(16) Administrator that must sign this annual return, making it responsible for the informational content included in its filings. In the case of a “large” plan, which is generally defined as a plan with 100 participants or more, is it the employer acting in its capacity as a 3(16) Administrator who must engage a certified public accounting firm to conduct annual audits of the plan’s financial statements for purposes of its Form 5500 filings.

10. Employer’s Traditional Role
Serves as Named Fiduciary
Hires and manages providers, including RK/TPA
Oversees plan administration, including compliance
Interprets plan and decides benefit claims
If the plan sponsor has not hired a third party to serve as its 3(16) Fiduciary, in addition to serving as the Plan’s 3(16) Administrator, the Plan sponsor will typically assume all other plan management responsibilities as the plan’s Named Fiduciary. For example, it will be responsible for hiring and managing the plan’s service providers, including the plan’s recordkeeper and third party administrator. It will also oversee the administration of the plan, ensuring contributions are timely made and that benefit payments are properly processed. As the Named Fiduciary, the plan sponsor is also traditionally responsible for ensuring that the plan is complying with all of the qualification requirements, including but not limited to nondiscrimination testing and the minimum distribution rules. The plan sponsor in its capacity as Named Fiduciary traditionally would also be responsible for interpreting the plan and for deciding benefit claims. This responsibility would include adjudicating claims disputes as well as approving hardship withdrawals. As we mentioned previously, the plan sponsor would presumably be relying on the services of a qualified TPA, but the plan sponsor (and not the TPA) would have ultimate responsibility as the plan’s Named Fiduciary over these matters.

11. Transferring Duties from Plan Sponsor to 3(16) Fiduciary
“Administrator” Duties
Plan document names third party as 3(16) Administrator
3(16) Fiduciary becomes responsible for reporting and disclosure requirements under ERISA
“Named Fiduciary” Duties
Plan document names third party and employer as Named Fiduciaries
3(16) Fiduciary assumes significant plan management responsibilities, but not all
The plan document is the key instrument for determining which person or party is going to serve as the plan’s 3(16) Administrator and Named Fiduciary. If you have a traditional arrangement where the employer serves as both the 3(16) Administrator and Named Fiduciary, the plan document will need to be amended in order to transfer these responsibilities to a 3(16) fiduciary. By amending the plan to provide that this third party will be serving as 3(16) Administrator, the 3(16) Fiduciary will automatically become responsible for the 5500 reporting and participant disclosure responsibilities by operation of law.
Similarly, the plan document can be amended to provide that the 3(16) Fiduciary will be a Named Fiduciary under the plan. But it is important for the employer to retain certain residual Named Fiduciary powers. For example, a 3(16) Fiduciary by its nature cannot hire itself. Only the employer would be able to do that. Thus, it would make sense for the employer to continue to serve as a Named Fiduciary, and for the employer and the 3(16) Fiduciary to share and allocate their responsibilities as Named Fiduciaries under the plan. Although the scope of a 3(16) Fiduciary’s responsibilities may vary, it would be fair to say that 3(16) Fiduciaries typically assume significant plan management responsibilities, but not all.

12. Risks of Serving as 3(16) Fiduciary
High Standard of Care Imposed Under ERISA
Duty of Loyalty: All decisions must be made solely in interest of participants
Exclusive Purpose: Fees for service providers must be reasonable
Duty of Prudence: Must provide services (including selection of other providers) in a prudent manner
Plan Governance: Plan document must be followed
There are significant risks associated with a firm electing to offer its services as a 3(16) Fiduciary. ERISA imposes a high standard of care on all fiduciaries, exposing them to liability when they fail to act in accordance with this standard. Of course, plan fiduciaries are not responsible for all operational errors and failures that might occur under a plan. However, they would be held responsible under ERISA for any such operational errors that arise in connection with a breach of their fiduciary duties. Plan fiduciaries generally must make decisions concerning the plan’s operation solely in the interest of plan participants (Duty of Loyalty). They must also identify the various types of fees payable to the plan’s providers, and determine that they are reasonable in light of the services provided (Exclusive Purpose Rule). Plan fiduciaries should also provide their services prudently. If these duties include selecting other service providers, the plan’s providers must also be selected prudently and monitored on an ongoing basis (Duty of Prudence). The plan’s fiduciaries must also follow the terms of the plan document to the extent they are consistent with the requirements of ERISA.

13. Fiduciary Liability and Penalties
Civil Actions Under ERISA
May be brought by DOL, participants or co-fiduciaries.
Breaching fiduciary is personally liable.
DOL Civil Penalty
Penalty amount is 20% of applicable recovery amount.
Excise Taxes
All plan fiduciaries, including but not limited to 3(16) Fiduciaries, are subject to potential liability for any losses or other harm caused by a fiduciary breach. ERISA permits the DOL, participants and co-fiduciaries to bring civil actions against another fiduciary who breaches his or her duty. The fiduciary is personally liable for any losses to the plan resulting from his or her breach(es) and any profits that the fiduciary obtains through the use of plan assets must be restored to the plan. Furthermore, the fiduciary is also subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. With the exception of the named fiduciary, a plan fiduciary’s personal liability to the plan is limited to the functions he or she performs, or is required to perform, under the plan. In addition, the DOL must assess a civil penalty equal to 20% of the applicable recovery amount in the event of any breach of fiduciary responsibility or violation by a fiduciary or knowing participation in such breach or violation by any other person. There is also a separate set of excise tax penalties for prohibited transactions. The excise tax is 15% per year and a “second tier” excise tax of 100% is imposed if the prohibited transaction is not timely corrected.

14. Co-Fiduciary Liability
Fiduciary may be liable for co-fiduciary’s breach of duty
If knowingly participates in co-fiduciary’s breach
If own breach enables co-fiduciary’s breach
If knows of co-fiduciary’s breach and fails to make reasonable efforts
Implications
Employer may be liable for 3(16) Fiduciary’s breach
3(16) Fiduciary may be liable for employer’s breach
ERISA Section 405(a) provides that a fiduciary shall be liable for a breach of fiduciary responsibility of a co-fiduciary in the following circumstances:
If he participates knowingly in an act of such other co-fiduciary, knowing such act is a breach;
If, by his failure to comply with the fiduciary standard of care under ERISA Section 404(a)(1), he has enabled such other co-fiduciary to commit a breach;
If he has knowledge of a breach by such other co-fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
Thus, a fiduciary who becomes aware of a co-fiduciary’s breach has a duty to take affirmative action. If the fiduciary fails to take all reasonable steps to remedy the breach, it is potentially liable for the co-fiduciary’s breach. This fact has significant implications for employers that hire 3(16) fiduciaries. Since an employer may be held liable for the 3(16) Fiduciary’s breach, they have an incentive to hire a qualified provider of 3(16) fiduciary services and to properly monitor them. And since a 3(16) Fiduciary is potentially liable for an employer’s fiduciary breaches, the 3(16) Fiduciary has an incentive to monitor the employer to ensure that it is satisfying whatever fiduciary duties are reserved to the employer.

15. Special Liability and Penalty Rules for 3(16) Fiduciaries
3(16) Fiduciary cannot delegate disclosure and reporting duties
In traditional arrangements, employer remains responsible even if error caused by TPA
Special Penalties
Form 5500 Failure
- $1,100 per day (DOL penalty)
- $25 per day (IRS penalty)
Disclosure Failure - $110 per day
We’ve been discussing the liability rules that apply to plan fiduciaries generally under ERISA. However, special liability rules apply to 3(16) Fiduciaries.
Unlike a Named Fiduciary which may delegate any portion of its fiduciary responsibilities to another person, a 3(16) Fiduciary cannot delegate any of its disclosure and reporting responsibilities to another fiduciary. Thus, in a traditional plan arrangement where the employer is designated as the plan’s 3(16) Fiduciary, the employer would remain responsible for satisfying these requirements, even if the employer were to rely on a TPA to prepare and deliver the required disclosures. If an error is made by the TPA, it would be the Plan sponsor in its capacity as the Administrator that would be subject to fiduciary liability for any resulting harm or loss sustained by participants. Separate penalties would also apply under ERISA.
The penalties that are imposed on a 3(16) Fiduciary for breaching its reporting or disclosure duties are significant, and they are specifically imposed on the 3(16) Fiduciary (rather than the Named Fiduciary or any other person). If an employer serving as the plan’s 3(16) Fiduciary were to fail to file a proper return on the Form 5500 on a timely basis, it would be subject to a DOL penalty of up to $1,100 per day and an IRS penalty of $25 per day. Upon a failure to furnish the required disclosures to a participant upon request within 30 days (e.g., SPD, plan document), the employer would be subject to a penalty of up to $110 per day.

16. Mitigating Fiduciary Risk
Duty of Prudence
Procedural prudence has protective value
3(16) Fiduciary should have documented policies and procedures
Prudence duty also requires substantive expertise
3(16) Fiduciary should have employees with relevant expertise
As previously discussed, plan fiduciaries are not responsible for all operational errors and failures that might occur in a plan. They are only responsible for those errors that arise as a result of a fiduciary breach. The key duty that 3(16) Fiduciaries should concern themselves with is the Duty of Prudence. If it is established that the firm is behaving imprudently, the firm would become liable for any losses that arise as a result of its imprudent actions. Fortunately, the courts have established that plan fiduciaries can comply with their duty to act prudently by acting with procedural prudence. Accordingly, 3(16) Fiduciaries should consider documenting their policies and procedures for overseeing their plan clients. The duty of prudence also requires substantive expertise. 3(16) Fiduciaries should also ensure that they have qualified employees with the relevant expertise. Many TPA firms already have the substantive expertise. If they were interested in offering 3(16) fiduciary services, they would simply need to establish or strengthen their oversight policies. For example, when overseeing a plan’s required minimum distributions, the firm should consider adopting a formal policy that describes how the firm should run regular reports to identify any participants who are obligated to take minimum distributions.

17. Types of Services Offered by 3(16) Fiduciary
TPA Serves as 3(16) Administrator
TPA agrees to be responsible for participant disclosures and 5500 filings
TPA alone would be responsible for any disclosure/reporting errors
Employer would not have ultimate responsibility
TPA’s service agreement may keep employer responsible for providing accurate information
By hiring a 3(16) Fiduciary, a plan sponsor is able to transfer certain fiduciary responsibilities to a third party, including those of a 3(16) Administrator. As discussed, a plan’s 3(16) Administrator is responsible for the reporting and disclosure obligations that are imposed under ERISA. And so, if a TPA serving as a plan’s 3(16) Administrator agrees to physically prepare and distribute the relevant disclosure materials (e.g., SPDs, 404a-5 Disclosures) to participants, the employer would be insulated from liability in the event of an error made by the TPA. The TPA alone would be held responsible for any potential failure to provide the proper disclosures to participants on a timely basis. For example, if the TPA were to fail to distribute a Plan document upon a participant’s request, it would be the TPA (rather than the Plan sponsor) that would be subject to the applicable $110-per-day statutory penalty.  Similarly, a TPA serving as the 3(16) Administrator would be responsible for all aspects of filing the 5500 filing, including the responsibility to sign the Form 5500 in its capacity as the 3(16) Administrator. And as the responsible fiduciary, the TPA (rather than the Plan sponsor) would be liable under ERISA for any delinquent or defective filings made on behalf of the Plan.  Of course, in light of the heavy responsibilities that are assumed by a TPA when it agrees to serve as a plan’s 3(16) Administrator, it is a customary practice for the TPA’s service agreement to keep the employer responsible for providing complete and accurate information for purposes of the plan’s reporting and disclosure obligation.

18. 3(16) Fiduciary’s Ability to Oversee Other Providers
Oversight of Other Providers
3(16) Fiduciary may hire other providers to assist with participant disclosures and Form 5500
Remains responsible as plan’s 3(16) Administrator and must oversee providers
Flexibility for TPA Firms
TPA firm may provide all related services as 3(16) Administrator, or hire and oversee other providers
As discussed, a TPA serving as a 3(16) fiduciary may agree to be responsible for the providing required disclosures to participants and meeting the 5500 reporting requirements as the plan’s 3(16) Administrator. However, it does not have to do all of this work alone. For example, the TPA may rely on the Plan’s attorney to draft the SPDs and arrange for the Plan’s Recordkeeper to distribute them to new participants as well as existing participants from time to time. But even if other providers assist with the preparation and delivery of the Plan’s SPDs, it is the 3(16) fiduciary who ultimately remains responsible for them. Thus, the 3(16) fiduciary has a duty to oversee the work of any other providers involved in the preparation and delivery of disclosures for participants. Similarly, a 3(16) fiduciary could always engage another firm to prepare the plan’s Form However, it is the 3(16) fiduciary that must sign this annual return, making it responsible for the informational content that is reported on the 5500 filings.
When a TPA firm assumes the responsibilities of a 3(16) administrator, it may take care of all of the relevant disclosure and reporting requirements by itself. Alternatively, the TPA firm could hire other providers just like a traditional employer would and oversee these providers in its capacity as the 3(16) fiduciary.

19. Responsibilities Transferred to 3(16) Fiduciary May Be Limited
Fiduciary responsibilities transferred to TPA may be limited to reporting/disclosure only
Plan sponsor remains responsible for all other Named Fiduciary responsibilities
TPA assumes role as 3(16) Administrator only
Illustration
TPA agrees to accept ultimate responsibility for participant disclosures already prepared by TPA
TPA agrees to sign 5500 filings already prepared by TPA
Some Plan sponsors may mistakenly believe that a 3(16) Fiduciary will automatically assume all of the Plan sponsor’s responsibilities. In fact, the transfer of fiduciary responsibilities from the Plan sponsor to the 3(16) Fiduciary may in fact be limited to the transfer of the Plans sponsor’s reporting and disclosure obligations as the 3(16) Administrator. Unless the 3(16) Fiduciary voluntarily agrees to accept additional fiduciary responsibilities, the Plan sponsor would remain responsible for discharging all other Named Fiduciary responsibilities, including the fiduciary oversight of Plan operation. For illustrative purposes, let us examine a hypothetical TPA firm that offers non-fiduciary administrative services to its Plan clients. Such services may include preparing and distributing participant disclosures, conducting IRS compliance testing, administering the Plan’s loans to participants, as well as the preparation of a “signature ready” Form 5500 for execution by the Plan sponsor each year. This kind of TPA firm could easily offer to serve as a 3(16) Fiduciary for its Plan sponsors clients by offering the following incremental services:
- accepting ultimately responsibility for ensuring that the participant disclosures provided to participants have been properly prepared and timely delivered by the TPA, and
- signing the Form 5500 returns as the Plan’s Administrator (and engaging an accountant, if necessary, to perform any required audits of the Plan’s financial statements for such Form 5500 returns).
And unless the 3(16) Fiduciary accepts additional fiduciary responsibilities, the Plan sponsor would remain responsible for all other Named Fiduciary responsibilities.

20. Other Types of Services Offered by 3(16) Fiduciary
TPA may agree to accept plan management responsibilities as Named Fiduciary
Adjudicating benefit claims and disputes
Ensuring operational compliance
Selecting and monitoring service providers
Ensuring plan fees are reasonable
TPA is typically not responsible for investments
Scope of Named Fiduciary Responsibilities
Will depend on plan document provisions and service agreement
A 3(16) Fiduciary can potentially accept a comprehensive level of fiduciary management responsibilities by serving as the Plan’s Named Fiduciary. By way of example, a TPA offering to serve as a 3(16) Fiduciary could agree to adjudicate any benefit claims and disputes with participants, ensure the Plan operates in accordance with all applicable tax qualification requirements under the Internal Revenue Code, select and monitor the Plan’s service providers and execute their service agreements on behalf of the Plan, and ensure that the Plan’s fees and expenses are reasonable. For practical reasons and to ensure that the firm does not inadvertently become subject to regulation under securities law, TPA firms typically are not responsible for overseeing the plan’s investments.
As discussed previously, typically, both the TPA firm and the plan sponsor will serve as Named Fiduciaries. The plan document will determine how these Named Fiduciary responsibilities are allocated between the parties, as well as the scope of the 3(16) Fiduciary’s plan management responsibilities. The service agreement between the plan sponsor and the TPA will also clarify the scope of the 3(16) Fiduciary’s role. For example, the plan document would typically provide that the employer (and not the 3(16) Fiduciary) will retain investment responsibility as the plan’s Named Fiduciary.

21. Oversight of Plan’s Recordkeeper
Importance of Recordkeeper’s Role
Recordkeeper is typically responsible for generating participant 404a-5 disclosures and statements
Also provides website and system for processing participant transactions
3(16) Fiduciary is responsible for disclosures and may also be responsible for plan administration
When Plan Sponsor Hires Recordkeeper
3(16) Fiduciary should require use of approved recordkeeper to ensure plan runs properly
Because of the central role that recordkeepers play in the administration of plans, any third party firm serving as the plan’s external 3(16) Fiduciary should pay close attention to the plan’s recordkeeper and its services. The recordkeeper is typically responsible for the generation of participant-level 404a-5 disclosures and benefit statements. Since it is the 3(16) Fiduciary that is ultimately responsible for participant disclosures, it is important for the 3(16) Fiduciary to make sure the recordkeeper is providing timely and complete disclosures to participants. The recordkeeper also typically maintains the website and other related systems that allow participants to enroll in the plan, as well as make contribution and investment elections. Depending on the scope of the 3(16) Fiduciary’s responsibilities, it may also have specific oversight responsibility for the recordkeeper or general management responsibility for the plan. Thus, it would be important for the 3(16) Fiduciary to monitor these systems, and to ensure participants’ instructions with regard to their plan accounts are being properly followed.
When the plan’s recordkeeping services are to be provided by a separate recordkeeper hired by the plan sponsor, we recommend that the plan’s external 3(16) Fiduciary require the use of an approved recordkeeper. So if necessary, the plan should transition to an approved recordkeeper before the 3(16) Fiduciary commences its services. Ensuring that the plan is working with a high quality recordkeeper should help the 3(16) Fiduciary manage the plan successfully and minimize its liability exposure for any errors made by the recordkeeper with respect to required participant disclosures.

22. 408(b)(2) Fee Disclosures of Recordkeeper
When 3(16) Fiduciary Hires Recordkeeper
Recordkeeper must provide 408(b)(2) fee disclosures to 3(16) Fiduciary
Plan Sponsor should consider requiring 3(16) Fiduciary to disclose recordkeeper’s fees
Should also confirm 3(16) Fiduciary is not hiring affiliated recordkeeper or receiving “kickbacks”
If the 3(16) Fiduciary has hiring authority over the plan’s recordkeeper, where the recordkeeper is a separate firm, the 3(16) Fiduciary would not have any 408(b)(2) duty to disclose the recordkeeper’s fee information to the plan sponsor. In fact, to the extent the 3(16) Fiduciary is responsible for hiring the recordkeeper, the recordkeeper would be obligated to provide its 408(b)(2) fee disclosures to the 3(16) Fiduciary (rather than the Plan Sponsor). Thus, if a plan sponsor delegates the authority to hire a provider to a 3(16) Fiduciary, the plan sponsor should consider requiring the 3(16) Fiduciary to disclose the fees that are payable to such provider. Even if the 3(16) Fiduciary would be responsible for evaluating the reasonableness of the provider’s compensation as the hiring fiduciary, it would be prudent for the plan sponsor to understand the fee arrangement. The plan sponsor should also confirm that the 3(16) Fiduciary is not hiring an affiliate or receiving any kickbacks or other prohibited compensation from the provider for ERISA purposes.

23. 3(16) Fiduciary’s Non-Fiduciary Services
Types of Non-Fiduciary Services
3(16) Fiduciary may offer bundled recordkeeping and TPA services
May also offer TPA services only
When Offering TPA Services
3(16) Fiduciary must coordinate its TPA services with recordkeeper’s administrative services
Areas of potential overlap include preparation and delivery of disclosures, loans and withdrawals
Once a TPA firm has decided on the scope of its 3(16) Fiduciary responsibilities, the firm must decide on which non-fiduciary services will also be provided by the firm. Of course, to the extent a necessary service is not provided by the 3(16) Fiduciary, the plan sponsor will need to arrange for another service provider to provide such service. If the TPA firm customarily offers bundled administrative services with a recordkeeper serving as its subcontractor, the TPA acting as a 3(16) Fiduciary could of course continue to offer these bundled services along with its fiduciary services. However, if the TPA is a standalone firm that does not offer any bundled recordkeeping services, the TPA will need to ensure that the plan client clearly understands which services will be provided by the TPA and which will be provided by the recordkeeper. Although recordkeepers and TPAs generally provide different non-fiduciary services, there are some areas of overlap and potential confusion. As a 3(16) Fiduciary responsible for general plan administration, it is critical for the TPA firm to clearly delineate which non-fiduciary services will be provided by it and which will be provided by another provider. For example, it is important for a 3(16) Fiduciary to spell out which party will take care of:
- Drafting the plan’s SPD,
- Generating Benefit Statements,
- Generating 404a-5 Participant Disclosures,
- Delivering the applicable participant disclosures,
- Providing plan documents upon request by participants,
- Processing participant loans,
- Processing hardships and other in-service withdrawals, and
- Processing distributions.

24. When 3(16) Fiduciary Hires Non-Fiduciary Providers
Relationship with Other Service Providers
3(16) Fiduciary’s duties as 3(16) Administrator include hiring accounting firm for audit as necessary
Additional duties may including hiring non-fiduciary service providers (e.g., recordkeeper)
Accountability of 3(16) Fiduciary
3(16) Fiduciary has duty to prudently select and monitor provider on ongoing basis
Not accountable for individual errors of provider, but responsible for prudent selection and monitoring
A 3(16) Fiduciary’s ERISA reporting duties include responsibility for the 5500, as well as responsibility for engaging an accounting firm to perform an audit of the plan’s financials as necessary. As we discussed, a 3(16) Fiduciary acting as a Named Fiduciary could also decide to assume the authority to engage other service providers to the plan.
Under ERISA, whenever a fiduciary selects a service provider, it generally has the related duty of monitoring the provider’s performance on an ongoing basis. The hiring fiduciary is not responsible for the day-to-day actions of the hired provider, but it is responsible for prudently hiring and monitoring the provider. For example, if an external 3(16) Fiduciary is responsible for selecting the plan’s recordkeeper, the 3(16) Fiduciary would not be responsible for a one-time error made by the recordkeeper that ended up harming plan participants if the error was not foreseeable and the recordkeeper had been doing a great job. On the other hand, if the recordkeeper makes these kinds of errors on an ongoing basis and the 3(16) Fiduciary fails to do anything about it, the 3(16) Fiduciary could be held accountable under ERISA for failing to monitor the recordkeeper and for failing to terminate its services on a timely basis. If the 3(16) Fiduciary is also providing recordkeeping services directly as a bundled provider, the 3(16) Fiduciary would of course be responsible for its own day-to-day actions as well as those of any recordkeeper acting as its subcontractor. The fact that the 3(16) Fiduciary is relying on a subcontractor would not relax or dilute its contractual responsibility to provide its promised services in a proper manner.

25. Customizing TPA Firm’s 3(16) Fiduciary Services Model
Determining TPA’s Fiduciary Services
May accept responsibility for 5500 reporting and disclosures as plan’s Administrator
May also accept comprehensive management responsibilities as plan’s Named Fiduciary
Illustration: TPA agrees to adjudicate benefit claims
Consider TPA’s Expertise and Procedures
Prudent process must be established for each fiduciary service
Illustration: Benchmarking review conducted to satisfy TPA’s duty to evaluate reasonableness of fees
TPA firms offering 3(16) services need to decide what the scope of their Fiduciary services is going to be. In theory, if a TPA firm’s goal is to hold itself out as a 3(16) fiduciary and do as little fiduciary work as possible, it could merely take over the Plans sponsor’s 5500 reporting and participant disclosure responsibilities under ERISA. At the opposite end of the spectrum, a TPA firm could assume a comprehensive level of fiduciary management responsibilities as the Plan’s Named Fiduciary in addition to its basic 5500 reporting and disclosure duties. For example, the TPA firm could assume the additional responsibility of adjudicating benefit claims and disputes, making sure that the Plan operates in accordance with all applicable tax qualification requirements, selecting and monitoring the Plan’s service providers and ensuring that the Plan’s fees and expenses are reasonable.
So how should a TPA firm decide on what level of fiduciary responsibility should be assumed by the firm? The answer to that question is going to depend on the firm’s own expertise and procedures. For each fiduciary service offered, the firm will need to ensure that it establishes a prudent process. For example, if the firm is going to be responsible for the reasonableness of the plan’s fees and expenses, it will need to follow through with benchmarking reviews and other prudent review procedures.

26. Limits on Employer’s Ability to Transfer Responsibilities to 3(16) Fiduciary
3(16) Fiduciary may accept broad role as both 3(16) Administrator and Named Fiduciary
But employer cannot eliminate all fiduciary oversight responsibilities.
Employer typically remains responsible for plan investments (or hiring 3(38) investment manager)
If the plan’s external 3(16) Fiduciary accepts the role of both the 3(16) Administrator and Named Fiduciary, it is possible for the 3(16) Fiduciary to broadly accept responsibility for the operation and management of the Plan as a whole. Unfortunately, even if a 3(16) Fiduciary agrees to assume full Plan management responsibilities as both the Plan’s Named Fiduciary and Administrator, it cannot fully eliminate the Plan sponsor’s fiduciary oversight responsibilities. As discussed earlier, TPA firms typically do not offer investment services. Accordingly, 3(16) Fiduciaries typically do not agree to be responsible for overseeing the plan’s investments. If the plan sponsor is interested in delegating investment responsibilities to a third party, it could always hire an investment manager as defined under ERISA Section 3(38).

27. Employer’s Duty to Monitor 3(16) Fiduciary
Plan sponsor remains liable for monitoring 3(16) Fiduciary.
Employer’s authority to amend plan document represents power to replace 3(16) Fiduciary.
Employer should review performance of 3(16) Fiduciary at reasonable intervals.
No need for employer to monitor other providers if responsibility transferred to 3(16) Fiduciary.
Even if a 3(16) Fiduciary serves as the Plan’s Named Fiduciary and Administrator as designated under the Plan document, the Plan sponsor remains responsible and liable as another Named Fiduciary to the extent it has the power to replace the 3(16) Fiduciary through its power to amend the Plan document. Therefore, as part of its responsibilities as an appointing fiduciary, the Plan sponsor has a duty to monitor the performance of the appointed 3(16) Fiduciary serving as Named Fiduciary or Administrator at reasonable intervals on an ongoing basis. Thus, it is important for Plan sponsors to understand that their decision to appoint a 3(16) Fiduciary is itself an affirmative fiduciary act that must be made prudently in accordance with the fiduciary standards of ERISA. Moreover, Plan sponsors should realize that they have an ongoing duty to monitor the performance of its 3(16) Fiduciary firm at reasonable intervals (e.g., annually).
If the 3(16) Fiduciary agrees to serve as the Plan’s Named Fiduciary and assume a broad range of plan management duties, the Plan sponsor would not have a duty to oversee the Plan’s other service providers (e.g., Recordkeeper). On the other hand, if the 3(16) Fiduciary narrowly assumes 3(16) Administrator responsibilities only (i.e., fiduciary responsibilities for the Plan’s reporting and disclosures obligations only), the Plan sponsor would remain responsible for monitoring all applicable service providers to the Plan as part of its general fiduciary oversight duties regarding the management and administration of the Plan.

28. Other Responsibilities Retained by Plan Sponsor
Coordination of Fiduciary Responsibilities
Any responsibilities not accepted by 3(16) Fiduciary remain with Plan Sponsor
3(16) Fiduciary’s agreement and plan document should be reviewed to confirm responsibilities
From the plan sponsor’s perspective, any fiduciary responsibilities that are not accepted by an external 3(16) Fiduciary will continue to reside with the plan sponsor. The plan sponsor should carefully review the 3(16) Fiduciary’s service agreement as well as the plan document to determine what fiduciary responsibilities are actually going to be transferred away from the plan sponsor. For example, the plan sponsor should clearly understand which service providers, if any, will be selected and monitored by the 3(16) Fiduciary for the plan. As part of its 5500 reporting responsibilities, the 3(16) Fiduciary will be responsible for selecting and monitoring the accountant, if necessary for plan audits. If the 3(16) Fiduciary is not responsible for selecting and monitoring the recordkeeper, it will be the plan sponsor’s duty to do so.

29. 408(b)(2) Fee Disclosures Fee Disclosure Requirements
3(16) Fiduciary must describe services and fees
Must also identify any subcontractors and disclose their compensation
Description of services should be consistent with plan document and service agreement
An external 3(16) Fiduciary is itself a covered service provider under the DOL’s 408(b)(2) fee disclosure rules. This means that the 3(16) Fiduciary must provide a description of its fiduciary and non-fiduciary services reasonably in advance of being hired, and it must also disclose its total compensation. If the 3(16) Fiduciary is providing bundled services with a recordkeeper acting as its subcontractor, the 3(16) Fiduciary will also need to describe the recordkeeper’s services and provide a breakout of its compensation. As a matter of law, the 3(16) Fiduciary’s 408(b)(2) fee disclosures will need to include a description of its services as well as its fiduciary status. This description of course will need to be consistent with the fiduciary provisions set forth in the plan document as well as the service agreement between the parties.

30. Suggested Best Practices: Scope of Fiduciary Services
Level of 3(16) Fiduciary Responsibility
Offer fiduciary service only if prudent process can be established and followed
Document selection and monitoring criteria when hiring other providers
Prepare regular reports of other providers’ services
Advisability of Different Service Levels
Simpler and easier to provide uniform level of fiduciary oversight across all plan clients
I would like to go over some best practices for 3(16) Fiduciaries that are willing to serve as 3(16) Administrators and Named Fiduciaries for their plan clients. As I mentioned, firms have a lot of leeway in deciding how much fiduciary responsibility to take on. And they should only offer a particular fiduciary service if the firm can establish and follow a prudent process. For example, if the firm is going to be adjudicating benefit claims, it should ensure that it has appropriate personnel with the skill to interpret plan documents and memorialize their decisions in writing in accordance with an established process. When it comes to hiring other service providers to the plan, it is also important for the 3(16) Fiduciary to document its selection and monitoring criteria, which should principally focus on the provider’s qualifications, quality of services and the reasonableness of fees. To demonstrate that all providers are being monitored, the 3(16) Fiduciary should prepare regular reports that address what services were provided by each provider and whether there were any failures and the correction of such failures. For example, a report might address the number of new participants entering the plan and indicate how many were sent enrollment kits.
I do not recommend that a 3(16) Fiduciary offer different service packages or levels of fiduciary oversight. Serving as a 3(16) Fiduciary is hard enough without having to remember whether a particular plan signed on for the complete fiduciary package or the lite version. So a 3(16) Fiduciary should figure out what fiduciary services it is willing to offer and then provide the same uniform level of fiduciary oversight across all plans.

31. Suggested Best Practices: 3(16) Contractual Considerations
Service Agreement for 3(16) Fiduciary
Should state which responsibilities will shift to TPA
Should confirm that Plan Sponsor remains responsible for hiring 3(16) Fiduciary
Plan Sponsor should remain responsible for providing complete and accurate information
Coordination with Plan Document
Confirm Administrator and Named Fiduciary provisions are consistent with agreement
Plan document may provide that both TPA and Plan Sponsor will serve as Named Fiduciaries
The 3(16) Fiduciary’s service agreement with the plan sponsor should clearly establish which fiduciary responsibilities will be shifted to the TPA firm willing to serve as the 3(16) Fiduciary, and which will remain with the plan sponsor. As a suggested best practice, the service agreement should confirm that the plan sponsor remains responsible for the selection and monitoring of the 3(16) Fiduciary, which makes intuitive sense since the 3(16) Fiduciary cannot hire or monitor itself. Of course, in light of the heavy reporting and disclosure responsibilities that are assumed by an external 3(16) Fiduciary, the service agreement should provide that the plan sponsor will be responsible for providing complete and accurate information for 5500 and 404a-5 disclosure purposes. The 3(16) Fiduciary’s service agreement should also clearly spell out which non-fiduciary services will be provided by the 3(16) Fiduciary. As we’ve discussed, the description of fiduciary responsibilities in the service agreement should be consistent with the Administrator and Named Fiduciary provisions in the plan document. If necessary, the plan document should be amended so that it is consistent with the service agreement. A plan document may state that both the Plan Sponsor and TPA will serve as Named Fiduciaries and provide for an allocation of responsibilities between the 2 parties. For example, the plan document could state that the Plan Sponsor will be the Named Fiduciary with the authority to hire the Plan’s recordkeeper and fiduciary service providers, and that the TPA will serve as the Named Fiduciary for other aspects of plan administration.

32. Suggested Best Practices: Monitoring Support for Plan Sponsor
Employer’s Duty to Monitor 3(16) Fiduciary
Must monitor 3(16) Fiduciary’s performance at reasonable intervals
Plan Sponsor should ask for regular updates
Illustration
3(16) Fiduciary provides updates on annual basis
Updates include summary information of:
(1) number of benefit claims adjudicated
(2) exception reports identifying potential issues
(3) performance assessment of other providers
(4) benchmarking analysis
Since the Plan Sponsor’s appointment of a 3(16) Fiduciary to serve as the Plan’s Administrator and Named Fiduciary is a fiduciary decision, the Plan sponsor remains responsible and potentially liable for its appointment decision. As part of its responsibilities as an appointing fiduciary, the Plan sponsor has a duty to monitor the performance of the appointed 3(16) Fiduciary at reasonable intervals on an ongoing basis. In order to demonstrate that the plan sponsor is discharging its monitoring duties in a prudent manner, the plan sponsor should ask the 3(16) Fiduciary for regular updates. Let me draw an analogy. When a plan hires an investment fiduciary, it is customary for the investment fiduciary to provide quarterly updates for the plan’s various investment options. Similarly, plan sponsors should consider asking their 3(16) Fiduciaries to provide regular updates of the plan’s various service providers. As we discussed previously, the 3(16) Fiduciary should be preparing regular reports documenting what services are actually being furnished by each provider as well as any failures that have occurred, so it should not be difficult to use these reports to create updates for the Plan Sponsor.
The updates do not necessarily need to be provided on a quarterly basis, and they do not need to be overly detailed. For example, the 3(16) Fiduciary could provide an annual update with metrics on the number of benefit claims and disputes that were adjudicated, exception reports that identify any potential tax qualification issues, performance assessments of the Plan’s other service providers, and a benchmarking analysis of the Plan’s operational fees and expenses. If it is not feasible to have an in-person meeting on an annual basis, the plan sponsor should request a telephonic meeting with the 3(16) Fiduciary to discuss its performance and overall status of the plan.

33. Conclusions Important Considerations
There is a business demand for 3(16) Fiduciaries
3(16) Fiduciaries provide services as a plan’s 3(16) Administrator and Named Fiduciary
Fiduciary risks may be mitigated through procedural prudence and substantive expertise
Certain limited duties cannot be transferred from plan sponsor to external 3(16) Fiduciary
But TPA firms still have substantial freedom to adopt customized 3(16) Fiduciary service models
In today’s presentation, we’ve gone over what it means to be a 3(16) Fiduciary. There are no hard and fast rules that govern when and if a TPA should offer 3(16) fiduciary services to its plan clients. However, TPA firms should recognize that there is a significant market and client demand for these types of services. As a legal matter, a 3(16) Fiduciary is actually providing a combination of services, serving in a dual capacity as the plan’s 3(16) administrator and Named Fiduciary. There are always fiduciary risks associated with furnishing fiduciary services under ERISA, but these risks can be successfully mitigated through procedural prudence, which would include documented policies and procedures. Furthermore, to comply with the fiduciary standards of prudence, TPA firms should also ensure that the firm has employees with substantive expertise. Certain limited duties cannot be transferred from the plan sponsor to an external 3(16) fiduciary for ERISA-related reasons. However, subject to these limits, TPA firms have substantial freedom to determine which services they would like to offer as 3(16) fiduciaries. And by carefully selecting the services that they would like to offer, TPA firms can adopt customized 3(16) Fiduciary Service models that provide the right solution for the firm as well as the firm’s plan clients.

34. Important Information
This presentation is intended for third party administrators and other service providers to 401(k) plans and other retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). This information is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or its affiliates.

35. Customized Service Models for 3(16) Fiduciaries
Marcia S. Wagner, Esq. q.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617)
Website: A