Understanding roles and responsibilities under ERISA 3(16)

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One of the challenges of establishing an ERISA-compliant retirement plan is determining who does what. For example, ERISA 3(16) refers to the section of the Employee Retirement Income Security Act of 1974 that establishes the role of the plan administrator. In Part I of this discussion, we described how the importance of the PA role starts to take shape when we look at the responsibilities involved in ERISA. For more detail into the tasks that this person is required to perform, we have created a list of key services that are often included in a typical 3(16) arrangement with a brief overview from the plan sponsor perspective. In short, hiring an outsourced plan administrator to do a job that can be handled by a third party administrator is unnecessary and even redundant.

(Please note that we use the terms "Plan Administrator," "PA," "3(16) Administrator," etc. interchangeably.)

1. Form 5500

All ERISA-covered, qualified plans are required to file Form 5500 each year, based on the information provided by the plan sponsor. The plan sponsor’s signature on the form is optional, but the PA is required to sign under the penalty of perjury.

The third party administration is usually already contractually bound to prepare the Form 5500 accurately and in a timely manner based on the information provided. In addition, IRS Circular 230 requires practitioners to have the necessary expertise and to take reasonable steps to ensure accuracy of the work they perform. Signing and filing the 5500 takes less than 15 minutes, and most sponsors may simply sign the form without reviewing. Even if an outsourced PA assumes that role, their service agreement will likely disclaim liability for any errors due to incorrect data being provided. So, the company saves a grand total of 15 minutes (at most) with the caveat that they are still on the hook if they provided bad data.

2. Approval of Distributions

Probably the most heavily promoted and visible service provided by an outsourced 3(16) Administrator is providing final approval of participant distribution requests (usually by signing-off on the distribution form).

TPAs and recordkeepers usually provide almost every aspect of this service as part of their regular fee, stopping just short of signing on the dotted line. Other than hardship distributions and domestic relations orders (see below), there aren’t many aspects of distribution requests that are subjective. Is the participant terminated from employment or not? Has the participant reached age 59 ½ or not? Sure, there are occasions when it might be open to interpretation whether an hourly employee who does not appear on the schedule for two straight months is terminated or not, but those are the exceptions, not the rule. A knowledgeable TPA can provide guidance in these areas as well as on hardship distributions and DROs without the plan incurring additional ongoing fees. And, as with the Form 5500, an outsourced PA service agreement likely disclaims any and all responsibility if the plan sponsor provided erroneous information.

Since ERISA prohibits the payment of duplicative fees, a plan sponsor might not want to be on the receiving end of a line of questioning about why the plan paid the TPA or recordkeeper to review these requests and then paid a 3(16) PA to review them again just so the sponsor could avoid signing-off on a form.

3. Determinations In Death and Divorce

No plan sponsor wants to get in the middle of benefits disputes arising out of the death or divorce of an employee. It is possible to outsource most of the work related to Qualified Domestic Relations Orders (QDRO) and beneficiary determinations, and knowledgeable TPAs often have the expertise to assist. If yours does not provide these services or there is an especially complex situation, the law allows you to charge the direct cost of reviewing a QDRO to the participant in question. So, send the order to your TPA or attorney and bill the one participant rather than making all participants shoulder the ongoing fee charged by a 3(16) Administrator, especially if it is an asset-based fee.

4. Provision of Participant Notices

Both the IRS and DOL have notices that are required to be distribution to participants at different frequencies. Examples include the following:

· Safe harbor notice
· Qualified default investment alternative notice
· Fee disclosure notice
· Summary plan description
· Summary annual report

Most TPAs and recordkeepers already provide this service, albeit usually with an additional ad hoc fee involved. Even if none of your existing providers can assist, there are any number of companies that can assist with fulfillment services such as printing and mailing at a cost that is far less than hiring a fiduciary service provider to do it.

5. Remittance of Participant Deferrals

From a liability perspective, what we’re talking about here is the possibility that the deposit would be a few days late and not that the employer intentionally uses those dollars for other purposes. Let’s look at an example to bring this into perspective. If you have $100,000 in employee deferrals that are deposited 5 days late, the lost earnings to be made up are less than $100.

Most plan sponsors already work with recordkeeping service providers that make it easy to upload the payroll file (including the scrubbing of the file to ensure it is complete), so all that is added with a 3(16) is the extra step of having another set of eyes in the process. Not that the extra internal control is a bad thing, but many TPAs already offer this service at a transaction fee for each payroll. They might not be acting in a fiduciary capacity, but if that TPA doesn’t deliver on its promises, you already have contractual recourse to have them make it right. And since breach of contract (through state court) is usually an easier and less expensive case to make than a fiduciary breach case (through federal court), that is likely a more practical form of recourse anyway.

If a plan sponsor is misusing employee deferrals there is quite a bit more on the line, but in that case, a whole army of 3(16) Administrators would not help. Besides, an employer who is inclined to misuse deferrals probably isn’t inclined to hire a 3(16) in the first place.

6. Review of Compliance Testing

Some outsourced Plan Administrators say they will review compliance testing to ensure accuracy. However, the typical TPA firm already has a professional duty (under IRS Circular 230 and/or various codes of professional conduct) to perform services with appropriate levels of diligence, expertise and accuracy. If they do not rise to that standard, you already have recourse without them needing to be fiduciaries.

There are some 3(16) Administrators who will only agree to act in that capacity if the sponsor hires a specific TPA — a TPA that is owned by one or more of the owners of the 3(16) shop. If they claim that they will ensure the accuracy of the compliance testing, aren’t they really just saying that the only way to be sure of the quality of their own work is to pay them extra to review it? And are they, in their capacity as 3(16), really going to call-out the TPA that they also own if something is wrong?

7. Interpretation of Plan Provisions

The Supreme Court has opined that in the event of a lawsuit, courts will defer to the PA’s interpretation of an ambiguous plan provision as long as the interpretation isn’t arbitrary or capricious. Most plan documents include related language when describing the duties of the PA.

So, the question is, how often there is truly an ambiguous plan provision and not just a mistake of fact? There have been any number of lawsuits in which the court found that the plan provisions were perfectly clear; they were just applied improperly.

And, if there is ambiguity of sufficient scale to require a 3(16) Administrator to resolve it, will the plan sponsor actually recuse themselves from the decision or accept the outsourced PA’s interpretation if it goes against them? Since the sponsor is already a fiduciary, any influence exerted in the decision-making process pulls them right into the middle of it.

Keith Clark and Adam Pozek are co-founders of DWC ERISA Consultants, a firm dedicated to providing third party plan administration, compliance and consulting services for qualified retirement plans. For more information, visit

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