Still Thinkin’ ‘Bout 3(16) Administration?

Ilene H. Ferenczy, Esq., CPC, APAManaging Partner

Ferenczy Benefits Law Center

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Agenda

• Relatively quick discussion about what 3(16) Administration is all about

• Pros and cons of 3(16) Administration: for you and your client

• Alternatives to 3(16) Administration that may solve the client’s issues and Pros and Cons

• Conclusion

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Introduction

• What is the “ill” that clients are trying to remedy by hiring a 3(16) TPA?

– Often, concern regarding liability• Illusory?

– Recognition that the plan sponsor does not have the wherewithal to be the plan administrator

– Someone, somewhere, said they should have a 3(16) administrator

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Introduction

• Once you identify the “ill”:

– Is having a 3(16) administrator the answer?

– Are there other valid options that will accomplish the goal?

– Is the client willing to pay to have the “ill” remedied?

• Do you want to be the one to solve this problem by offering 3(16) services?

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LET’S TALK ABOUT: WHAT IS 3(16) WORK . . . REALLY?

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Statutory Background

• ERISA §3(16) defines the “administrator” to be the person designated by the plan or, if not so designated, the plan sponsor

• ERISA §402(a)(1) states that every plan has to have a “named fiduciary” who “shall have authority to control and manage the operation and administration of the plan”

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The Two Main Plan Fiduciaries

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The Plan Administrator The Investment Fiduciary

Right to Delegate

• ERISA §402(b)(2) says that a plan has to have a procedure for delegating responsibilities about plan operations and administration

• ERISA §406(c)(1) expressly provides for the allocation by a fiduciary of any of its responsibilities to another fiduciary, whether named in the plan or not

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Delegation Rules

• The delegator remains responsible for anything not delegated

• The delegator remains responsible for prudent delegation – both initially and on an ongoing basis

• The delegate is primarily responsible as a fiduciary for the delegated items

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Delegation by Investment Fiduciary Has Always Been Common

• Investment Fiduciary can:

– Do everything itself

– Get advice (from a fiduciary adviser under ERISA §3(21)(a)(ii)

– Delegate investment decision-making to an investment manager under ERISA §3(38)• Note that a true “investment manager” must be an RIA under

federal or state law, a bank, or an insurance company

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Delegation by Plan Administrator Has Been Common in Health Plans

• Health plans commonly delegate responsibilities to an insurance or other benefits company

– Evaluate and pay claims

– Answer participants’ and service providers’ questions

– Provide documents and forms toparticipants

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What Gets Delegated to a 3(16) Provider?

• First question: What are the Plan Administrator’s duties under ERISA, the IRC, and the Plan?

• Second question: Which of those are going to be delegated from the Plan Administrator to the 3(16) provider?

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ERISA and the Plan Administrator• Nowhere in ERISA does it specifically state the full range of

responsibilities of the Plan Administrator

• However, ERISA does provide in various sections that the Plan Administrator is responsible for:

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• Furnishing the SPD and SMMs to participants

• Notifying DB Ps of funding-based distribution limitations

• Hiring actuary, qualified public accountant

• Filing Forms 5500 • Providing 204(h) notices to Ps • Acting as agent for service of legal process for the plan

• Administering QDROs • Providing QACA notices to Ps • Notifying Ps of change in investment options

• Providing DB annual funding notices, DC SARs

• Notifying DOL/Ps re transfer of excess pension assets to health benefit accounts

• Dealing with the PBGC in re DBplan terminations

• Providing participants with blackout notices

• Providing Ps with notice of right to divest from ER securities

• Advising PBGC of reportable events

• Maintaining plan records • Suing on behalf of the plan • Responding to P requests

What About theInternal Revenue Code?

• Code §414 defines the “plan administrator” similarly to ERISA §3(16)

• However, the Code does provide in various sections that the Plan Administrator is responsible for:

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• Administering QDROs • Providing 402(f) notices re rollovers

• Filing actuarial report with IRS

• Filing Forms 1099R • Doing mandatory rollovers • Withholding taxes from distributions

• Filing Forms 5500

The Plan Document Is Usually Broader• Key issue: authorization to interpret plan

provisions (Firestone v. Bruch authority)

• Others:

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• Determine answers to admin-related questions

• Establish rules and procedures • Correct defects

• Determine eligibility for participation/receive benefits

• Handle claims • Determine amounts of benefits

• Authorize discretionary disbursements

• Maintain records • Enter into contracts for the plan

• Determine liquidity needs and coordinate with trustee

• Provide notices to participants • Assist participants

• Furnish disclosure information to participants

• Determine QDRO validity • Appoint other advisers

• Act as named fiduciary

Scope of 3(16) TPA Services

• It’s a continuum …. Where do you fall?

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High Service 3(16)

Mid-Service 3(16)Low Service 3(16)

(see worksheet)

Key Elements of a Good 3(16) Product

1. Properly document what you are going to do and what duties the client retains

2. Do not do what you are not authorized to do

3. Make sure that those who handle 3(16) duties are well trained and know what activities are fiduciary in nature

4. Checklists and procedures and oversight

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Means of Delegation

• Need to check out the plan document

• Commonly, the document is silent as to the method of delegation, although generally requires it be in writing

• Our preference: a combined service agreement and delegation document

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Should the 3(16) Administrator Be the Plan Administrator in the Document?

• Our recommendation: NO

• Why?

– If you are the Plan Administrator, you are responsible for everything (even things you didn’t contemplate), unless you affirmatively delegate

– If you delegate, you are responsible for prudently delegating (is the delegate qualified?) and monitoring the delegate (is the delegate doing a good job?)

– Do you really want to delegate to your client?

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SPD Formality• The Plan Administrator must be listed on the SPD

– If you are performing Plan Administrator details that affect the participants, you should be listed

– Recommendation: include language in both your agreement and on the SPD supplement that states that, if your services are terminated under the contract, so is your status as the Plan Administrator (and the Plan Sponsor automatically replaces you if no other delegation happens)

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Fidelity Bonding

• ERISA §412 states that, “Every fiduciary of an employee benefit plan and every person who handles funds or other property of such aplan” must be bonded

• Labor Reg §2580.412-1, et seq., seem to limit bonding obligation to those who handle “funds or other property” of a plan

– BUT, includes people who authorize disbursements

– Conservative opinion: if you authorize disbursements, you handle funds

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WEIGHING THE PROS AND CONS OF 3(16) ADMINISTRATION – FOR EVERYONE!

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Why Does a Client Want 3(16)?

• As noted earlier, generally three reasons:

– Concerns about liability of being a fiduciary and wanting to offload that liability to someone else

– Desire for professional plan administration (and/or recognition that the company does not have the people and wherewithal to do administration)

– Someone told them they want this

• Your first responsibility as a consultant is to see if the client’s reason for seeking out 3(16) services aligns with the work you do (proper fit?)

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What Does the Client Really Get From 3(16)?

• Liability reduction– No direct liability for failure unless it can be shown that the

delegation was imprudent• Converts responsibility for the task to responsibility to make sure they

hire someone qualified for the task

• But note: the client will be sued anyway, as the Plan Sponsor and the main Plan Administrator, so having a 3(16) person will not usually forestall being named in a lawsuit

• Better service– TPA motivated to be more responsive, careful, etc.

• Do you think so?

• Keeps client company on target with its own business– Less commitment of time/resources from the client

• Do you think so?

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Are You Adding ValueThat the Client Can See?

• Is the life of a 3(16) client easier than a non-3(16) client?

– Fewer worries?

– Less work?

– Happier participants?

– Fewer mistakes?

• If the answer to this is “no,” there’sa flaw somewhere

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What Does the TPA Get from Offering 3(16) Services?

• Higher billings: if you are not charging more for 3(16) services, why not?

• Stronger relationship with client: the more you do for the client, the harder it is for them to leave you

• More control: by controlling more of what goes on with the plan, the more likely you are to have a problem arise because the client didn’t know any better

• Keeping up with the market: your competitors may be offering it

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What Does the TPA Getfrom Offering 3(16) Services?

• Can accommodate many different referral sources

– Each plan can have a different financial adviser, auditor, recordkeeper, so it does not impair relationships with referral sources

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Question: Are You Seeing Value in Offering this Service?

• More money?

• Better retention of clients?

• More referrals from advisers?

• Better control over plan administration?– More info more readily available?

– Client more cooperative?

– Client’s cooperation less important, because you are in control?

• Clients more satisfied?

• If the answer to all these is “no,” there’s something wrong

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3(16) Cons for TPA• Potentially more liability

– You are held to a higher standard, so you can be “wrong” more easily

– You have a duty to the participants that you did not have before

– Lawsuits more likely to be in federal court – more expensive, less accessible

– Errors mean more because of this

• Do you need more systems, oversight, formalities?

– Separate company?

– Separate employee group?

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3(16) Cons for TPA

• You have potential for co-fiduciary liability

– A fiduciary is financially responsible for the breaches by other fiduciaries if s/he knows of the breach and does not make reasonable effort to remediate

– How does this change:• Your oversight over client work?

• Your relationship to your client?

• You may need different E&O insurance to cover you for fiduciary breach

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SUGGESTIONS TO HELPTHE PROCESS

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First and Foremost

• Think this through carefully

– What are you going to do?

– How are you going to do it well?

– Can you get paid enough to make it worth your while?

– How and to whom are you going to sell this service, and is there really a market for it?

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Second

• Create a structure inside your operation that will enable you to do this

– Different procedures

– Different departments?

– Different oversight?

• Get all the necessary tools

– Systems, if needed

– Insurance coverage

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Third

• Protect yourself from liability

– Your first line of defense against liability is YOU

• Operate well

• Establish lines between what is okay and what is not

• Be properly insured

– Have a detailed service agreement and delegation document

• Everyone knows what you do and what you don’t –no ambiguities that can get you into trouble

• Do not bite off more than you can chew

– Liability limitations and reductions

• Some are not legal – be sure to have those that are

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Third (continued)

• What to do about co-fiduciary liability?

– Is it better to know than not know?

– What information do you get automatically that can be presumed to tell you about a breach of duty by another:• Information on deferral deposits?

• Investment information?

– What should you do with the information you receive to either oversee potential breaches or prevent knowledge?

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Fourth

• Watch what goes on and remediate as needed

• Do not “set it and forget it!”

• Consider developing a “war chest” equal to or more than your insurance deductible, so you are not hard-pressed financially if something happens

• Make sure that your door is open to your employees about concerns they might identify before you do … empower them to share your concerns

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ALTERNATIVES TO 3(16) THAT MAY ACCOMPLISH SIMILAR OBJECTIVES

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MEPS – AN ALTERNATIVE TO

3(16) OR SOMETHING

COMPLETELY DIFFERENT?

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MEP Pros for Clients

• Theoretically, a MEP enables the client to turn over most plan responsibilities to a professional

– Reduced liability for the details of administration

– Professional management

– Less done in client’s office, so time saver

• A MEP is a set menu: very few decisions to be made by the employer, who is ill-equipped to make them

– Usually available funds are chosen

– Recordkeeper is hired

– Documents are drafted

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MEP Cons for Clients

• Harder to leave: requires legal documentation and spinoff

• Less control: if you don’t like the individual service providers, you can’t change them

• Money is not in your control as either Sponsor or Plan Administrator

– Easier to be embezzled by others

– Easier to have results of opinions “forced” on company

– Need cooperation of MEP sponsor to get out

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MEP Pros for TPAs

• Client more closely tied in

– Leaving a MEP involves legal documentation and a spin-off • More expensive to do than just firing the TPA

– Harder for the client to fire you and retain what it likes• Some of the service providers might not work outside the MEP

– Easier for you to “control the conversation”

• The universe of plan options being served is smaller

– Don’t offer what you don’t want to service

– One plan document to know and love and amend as needed (no weird attorney plans with different language)

– Easier to train your people

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MEP Pros for TPAs

• If you are the MEP sponsor, you control the hiring and firing of the other service providers

– Recordkeeper

– Investment manager

– Auditor (if needed)

– Lawyer

– Plan document provider

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MEP Cons for TPAs• One Bad Apple Rule: still applicable and

still a pain

• Not all rules are settled: likely to have new legislation in the next few years– Even if it’s positive legislation, you still need to react to it,

often through new document provisions, new procedures

• If you are not the sponsor, you can be fired … and lose all your clients in one fell swoop

• You are probably doing a MEP through:– One recordkeeper

– One investment adviser

– One CPA auditor

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MEP Cons for TPAs• We don’t know what’s going to happen

– Could be good: Proposed legislation may take care of one bad apple rule and permit one Form 5500

– Could be bad: Proposed legislation may also require more TPA-level reporting

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THE PLAN EXCHANGE – A

VARIATION ON A MEP

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Concern Being Addressed• The One Bad Apple Rule: all of the employers in a

MEP are subject to disqualification if there is a defect anywhere in the plan

• Exchange solution:

– Separate plans with one common trust (and possibly group annuity contract)• Everyone is their own apple!

– Plan documents are the same – each plan is a “component” of the whole

– One 3(16), one 3(38), one recordkeeper for all plans in the exchange

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Exchange Pros for Client

• Similar reduction of fiduciary duty as with MEP

• No exposure under one bad apple rule

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Exchange Cons for Client

• Similar to a MEP

– Less control over structure, service providers, money

– Harder to leave• Client has own plan, but will need new document, new funding

mechanism if leave the exchange

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Exchange Pros for TPA

• Similar to MEP

• Lack of one bad apple rule means one error may be less costly than under MEP

• Still “hooks the client” – harder to leave

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Exchange Cons for TPA

• Same as MEP, 3(16):

– Increased liability

– If not in control, can be fired

– May chill business with other referral sources

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SO WHERE DID WE END UP?

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All Are Solutions … Sometimes

• All of these options can work to:

– Relieve the employer of some responsibility for that which they know little about

– Better integrate employer with TPA so that it is not as easy to change providers

– Provide additional income to the TPA through additional fees for taking a bigger role

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Compare and Contrast• 3(16) work is more individualized, does not require

or provide significant consistency from one client to the next

– Can accommodate all referral sources, platforms

– Can remove parts that don’t work

• MEP and Exchange: less individualized

– Easier to handcuff client to the plan

– May or may not be subject to one bad apple rule

– Uncertainty due to proposed legislation

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Questions?

Contact Information

Ilene H. FerenczyFerenczy Benefits Law Center

2200 Century Parkway, Suite 560

Atlanta, Georgia 30345

(678) 399-6602 (V)

(866) 515-5140 (toll free)

(404) 320-1105 (F)

ilene@ferenczylaw.com

Follow us on Twitter: @ferenczylaw

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