Hiring an ERISA 3(16) Administrator – Does This Relieve You of Fiduciary Duties?

ERISA | June 27, 2019 | Holtzman Partners

In
recent years, many employee benefit plan sponsors have hired independent ERISA
3(16) administrators in an effort to divest themselves of plan administration
responsibilities.

This
can be a smart move for sponsors who don’t have an in-house expert who is
well-versed in all the details and nuances of ERISA compliance. However, it’s
important to remember that outsourcing plan administration does not relieve sponsors of their fiduciary
duty, as some sponsors mistakenly believe.

Plan Administrator
Responsibilities

According
to ERISA Section 3(16), an employee benefit plan administrator is responsible for
daily operations of the plan and for signing the annual Form 5500.

The
plan administrator should be identified in the plan document. If the document
is not specific in naming an administrator, the plan sponsor is considered to
be the administrator from a 3(16) fiduciary perspective. The specific
responsibilities of the plan administrator as detailed by ERISA Section 3(16)
include the following:

1. Managing the
plan’s investment menu.

This includes investment selection and monitoring. As a sponsor, you can hire
an ERISA Section 3(21) or an ERISA Section 3(28) investment provider to monitor
funds and make investment recommendations if you don’t have the necessary
education and expertise.

2. Overseeing plan
administration.
This
includes maintaining and interpreting the plan document, overseeing plan
operations, providing benefit statements and required disclosures to
participants, ensuring timely deposit of participants’ contributions into their
accounts, and complying with required government reporting.

3. Engaging plan
service providers.

If you outsource some plan functions to one or more service providers, you must
oversee their performance and monitor their fees to ensure that they’re
reasonable.

Limitations of 3(16) Administrators

Independent
ERISA 3(16) administrators may accept responsibility for one or more of these
duties. Their fee is usually based on the size of the plan or the amount of
plan assets. However, independent administrators generally will not agree to be named the plan
administrator in the plan document or to sign Form 5500.

In
other words, they only take ERISA Section 3(16) responsibility for the duties
that are detailed in their contract. You as the plan sponsor would retain
responsibility and fiduciary liability for administering all other plan duties,
as well as monitoring the prudence of the Section 3(16) administrator
selection.

To
do this, you need to evaluate such factors as:

  • The 3(16) administrator’s qualifications and the reasonableness of fees charged.
  • The quality of services the 3(16) administrator provides.
  • The potential for conflicts of interest between the 3(16) administrator and any other outsourced service providers you use.
  • The capacity of the 3(16) administrator to pay any legal claims that may arise in connection with a breach of 3(16) plan duties.

You
should also look carefully at the contract to see if there are any caveats that
limit the 3(16) provider’s fiduciary responsibility. Most of the administrative
duties the provider takes on are conditioned on receiving timely and accurate
payroll and census data. Therefore, providers usually seek to limit their
liability if they don’t control the generation of this data.

The Bottom Line

As
a plan sponsor, you cannot avoid fiduciary responsibility and potential ERISA
liability simply by hiring an independent ERISA 3(16) administrator. Such an
administrator does not possess the data and authority needed to act in a
full-scope Section 3(16) capacity.

In fact, the very act of hiring an independent administrator is a fiduciary function. Failure to monitor the 3(16) provider’s performance—and terminate the provider if performance is sub-standard—is a breach of ERISA fiduciary duty.

Please contact our team at 512.610.7200 if you have more questions about the role of an independent ERISA 3(16) administrator.

Our team provides the technical experience and industry depth that your team can trust.