3(16) fiduciary services are rapidly gaining popularity in the retirement industry. But why? What do these services entail? Are they worth the investment for plan sponsors? We’ll cover these topics in the following post.
What are 3(16) fiduciary services?
When a business owner sets up a retirement plan, they are held legally responsible for the compliance of that plan. This is called fiduciary liability. Most employers aren’t familiar with all the rules and regulations established by the IRS and DOL, so this can seem like an impossible task. That’s where 3(16) fiduciary services come in. These services offer the option to outsource the administrative tasks associated with plan compliance. Therefore, business owners experience reduced workload and risk.
Why are 3(16) fiduciary services so popular?
As rules and regulations within the retirement industry become more and more complex, 3(16) fiduciary services become more and more popular. With numerous, ever-changing, and tedious requirements, retirement plans can be extremely difficult to administer without expert help.
In a nutshell, here are the reasons 3(16) fiduciary services are important and gaining popularity:
- Qualified retirement plans are heavily regulated. To gain the numerous tax benefits provided by retirement plans, these plans (qualified plans) must undergo specific tests and follow numerous rules and regulations from the IRS and DOL. With legislation constantly changing, it’s difficult for business owners to keep plans in compliance. A good 3(16) fiduciary can manage this.
- Retirement plan administration requires specific expertise. Retirement plans can be very complex. Hiring ERISA experts who are trained on retirement-specific legislation, along with testing requirements, and other important plan details, can offer employers peace of mind and ensure plan compliance.
- Mistakes are easily made and can add up fast. Without retirement experts, plan errors are common. Even companies with dedicated HR or retirement resources can easily miss a deadline or detail and let tiny administrative items slip through the cracks. Sometimes, the resulting penalties and fines from these errors can be costly. Hiring a good 3(16) service provider prevents these errors and the subsequent costs.
- Dedicating resources to hire and train staff is time-consuming and costly. Depending on the business, outsourcing the administrative tasks and compliance to a 3(16) fiduciary can be more cost effective than hiring and training staff to manage the plan.
What exactly do these 3(16) fiduciary services entail?
Differing levels of service and types of providers exist when it comes to 3(16) plan administration. Some providers simply take on a few tasks, while some do nearly all the administrative work associated with the plan. Some providers take on fiduciary liability, while others do not. It’s important for plan sponsors to review the service agreement of the companies they are evaluating to determine what specific services and liability level the company provides.
Below is a very a general overview of the services that can be provided by a 3(16) fiduciary:
- Plan document management, distribution, and retention
- Payroll data review and integration
- Participant eligibility management and enrollment
- Employee disclosures and notifications
- Loan administration, approval review, and distributions
- Plan compliance testing and corrective actions
- Sign and file Form 5500 and other required forms, as needed
Example: A closer look at eligibility and enrollment
Still not sure what exactly these service providers do? Let’s look further at eligibility and enrollment as an example.
Participant eligibility management and enrollment. Most retirement plans require an eligibility period prior to allowing a new hire to enroll in the plan. This timeframe can vary based on the employer’s wishes and plan design. For example, let’s say new employees are eligible to enter the plan 6 months after their start date. The employer is then required to keep track of this time, send enrollment materials to the employee before their eligibility date, ensure the employee has been notified they can enroll on their eligibility date, and that they have all the necessary materials to do so.
That’s a lot of work for just one aspect of plan administration. This can add up quickly, depending on how fast a company is growing, not to mention all the other various aspects of plan compliance. This is work a good 3(16) service provider can take off plan sponsors’ plates.
Who are the best candidates for 3(16) fiduciary services?
Not every single plan sponsor needs a 3(16) fiduciary service provider. Ideal candidates for this service include employers who:
- Don’t have an employee dedicated to retirement plan administrative work who is knowledgeable on IRS and DOL guidelines
- Don’t have time to review payroll or retirement plan data carefully to ensure plan compliance
- Aren’t confident that their plan would be found in compliance during an audit
Are 3(16) fiduciary services worth the cost?
If the plan sponsor is an ideal candidate and the service provider acts as a fiduciary (reducing liability), 3(16) services are a great investment. When compared against the cost of the salary of an HR professional or the costly errors that are avoided by outsourcing these tasks and plan compliance, the fees for services are minimal. Of course, this varies by provider, so employers should evaluate and benchmark service providers to ensure their costs are reasonable.
Want more information?
If you or your clients are interested in more information on 3(16) fiduciary services, we’re here and ready to help. Fill out this quick form and we’ll send you our Retirement Plan Roles & Responsibilities Guide that breaks down which parties are responsible for which retirement plan tasks when EGPS is the third-party administrator (TPA) and 3(16) fiduciary.
