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A 3(16) Fiduciary: Reasons To Consider Hiring One For Your 401(k)

by John Stebbins on Feb 17, 2022 11:40:34 AM

If you offer a 401(k) to your employees, then you know that the plans are highly regulated by ERISA, and compliance violations can be costly. For many business owners, it can be too complex or time consuming to get the responsibilities right. That’s where a 3(16) fiduciary may be able to help.

At Complete Payroll Solutions, we help thousands of clients administer retirement plans for their employees, and often serve as a 3(16) fiduciary as well. To help you understand what the requirements are for 401(k)s and how a 3(16) fiduciary can ensure you meet them, here we’ll discuss:

  • What are the fiduciary requirements for 401(k) plans
  • What is a 3(16) fiduciary
  • Do 3(16) fiduciaries accept liability
  • Do I need a 3(16) fiduciary
  • Is a TPA a 3(16) fiduciary

After reading this article, you’ll be able to decide if hiring a 3(16) fiduciary is the right step for your company to avoid 401(k) compliance missteps.

What are the fiduciary requirements for 401(k) plans?

When it comes to managing your retirement plan for your employees, there are generally two types of responsibilities: business tasks like deciding which features to include or when to amend a plan and fiduciary ones, which include:

  • Acting exclusively in the interest of plan participants and their beneficiaries
  • Acting for the sole purpose of providing benefits to plan participants and their beneficiaries and defraying reasonable plan expenses
  • Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters
  • Following plan documents
  • Diversifying plan investments

Plan sponsors are responsible for all of these aspects of their retirement plans; however, you’re allowed to hire an expert, or fiduciary, to act on your behalf. Since there are a lot of requirements when it comes to managing a 401(k) plan, you may decide to hire a professional, such as a 3(16) fiduciary, to minimize your risk.

What is a 3(16) fiduciary?

A 3(16) fiduciary for a 401(k) takes complete responsibility for all aspects of plan administration, assuming full discretionary control and taking on the liability. They will handle a number of important tasks such as:

  • Preparing and signing off on plan documents, including updating plan documents for recent law changes
  • Managing vesting, eligibility calculations, and loan policies
  • Preparing and issuing notices and disclosures such as Summary Annual Reports and Summary Plan Descriptions
  • Monitoring for plan irregularities such as not depositing deferrals timely or not making employer matching contributions to all appropriate employees, among others
  • Preparing Form 5500 and all required schedules for submission
  • Reviewing deferrals for hardship withdrawals
  • Approving separation distributions

Keep in mind that a 3(16) fiduciary is not responsible for investment oversight; 3(38) and 3(21) fiduciaries would have that role. Still, for many employers, it’s a relief to not have to take on the responsibilities of a 3(16) fiduciary. For example, you wouldn’t be liable if a plan document doesn’t get distributed to a participant upon request nor would you have to pay the penalties.

Do 3(16) fiduciaries accept liability?

As we just discussed, a 3(16) fiduciary takes on legal responsibility for a retirement plan. That means you can insulate yourself against making the types of errors that can carry significant penalties. For example, a frequent issue among companies is filing Form 5500 late, which can result in an IRS penalty of $25 a day up to a maximum of $15,000 and a DOL fine of up to $1,100 a day, with no limit. By transferring liability to a 3(16) fiduciary, you’re not at risk for paying these penalties if the form gets filed late.

Do I need a 3(16) fiduciary?

As a plan sponsor, you can maintain responsibility for your fiduciary responsibilities; there’s no requirement that you hire an outside service provider. However, there are several key advantages to having a 3(16) fiduciary. These include:

  • Freeing yourself or your staff up from the time-consuming responsibilities of keeping your plan free from errors
  • Not having to worry about having the specialized knowledge in house
  • No longer being responsible for ERISA compliance
  • Transferring potential liability to the 3(16) fiduciary

As a result, outsourcing to a 3(16) fiduciary is becoming increasingly common. However, it’s important to note that even if you hire a 3(16) fiduciary to assume responsibilities as the named fiduciary, you’re not completely off the hook as the plan sponsor. You’ll still need to make sure you diligently select and monitor the service provider. That means you’ll need to monitor their performance regularly at reasonable intervals.

Is a third-party administrator a 3(16) fiduciary?

The role of a 3(16) fiduciary is different from that of a third-party administrator (TPA). Traditionally, a TPA handles tasks associated with the day-to-day operation of the plan and compliance activities like annual nondiscrimination testing.

However, some TPAs now perform certain fiduciary functions as 3(16) fiduciaries. At Complete Payroll Solutions, for example, we are able to act as both a 3(16) fiduciary and TPA

In addition, trust companies as well as certain registered investment advisors may serve as 3(16) fiduciaries. Just remember that as the plan’s administrator, if you decide to hire a third party to serve in this role, you’ll need to amend your plan document to designate them as a provider of fiduciary services.

How to Decide if a 3(16) Fiduciary is Right for You

Since 401(k) plan fiduciary responsibilities and legal requirements can be complicated, more and more companies are outsourcing to better protect themselves. And one of the most common service providers that businesses hire is a 3(16) fiduciary. With this approach, you can reduce your administrative burden and risk so you can focus on your business.

If this sounds like you, and you’re looking for the right 3(16) fiduciary, you may be wondering if Complete Payroll Solutions may be a good fit. We’re an ideal choice for your business if you:

  • Already have your payroll managed by us and want a seamless, integrated solution
  • Want a TPA administrator who specializes in meeting your legal obligations
  • Are looking for an experienced and knowledgeable retirement professional as a dedicated point of contact who will work with you one-on-one

To learn more about our 3(16) fiduciary and other 401(k) services we provide, read our next article on our retirement plan offerings. For additional help choosing a partner, read our checklist of the top factors to consider when evaluating TPAs.

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