Satellite Radio and 3(16) Services
Editor’s Note: This article is a follow-up to “Is There a Market for 3(16) Plan Administrator Services?” the third in a three-part series of columns by Peter Preovolos that recently appeared in
Many years ago when satellite radio started broadcasting, I thought it was the most ridiculous thing ever. I thought, “Who would ever pay to listen to the radio? It’s not like cable TV.” Fast forward several years, and I have now logged tens of thousands of miles listening to CNBC, ’80s on 8 and even Blue Collar Radio. When I occasionally have to drive a car that does not have satellite radio, I find myself fidgeting with the dials in a confused state. When we moved, the satellite radio bill got lost and was not paid. When they suspended my satellite radio service, I was immediately on the telephone to get the bill paid and to make sure that they had our correct address. I handled it as fast as I would have handled a billing issue on our electric service or my cell phone.
As a business owner, I learned three things from my satellite radio experience:
- Be careful when making emphatic statements such as something being ridiculous, because you may have to backtrack on that statement at some point in the future.
- Don’t judge a product or service until you try it.
- Just because I was not interested in a service or product does not mean that a market does not exist for that product.
The same things can be said about 3(16) fiduciary services. Not every employer is going to want to purchase 3(16) fiduciary services, but a market does exist for these services.
At one end of the 3(16) purchaser spectrum, there are employers who are just too busy and want administrative help. This makes sense if you think about how lean human resources and benefit departments have become over the years. And, in the case of the benefits department, it may be that they are having to reallocate resources to deal with issues on the health plan. Additionally, some recordkeeping products leave certain holes that employers may not have the resources to handle. For example, in the small end of the market, it would not be uncommon for the record-keeper to provide a sample participant notice, but instruct the employer to make copies and distribute it. This is not an unreasonable business approach, but would you take the “over or under” bet on 50% of those notices actually getting distributed?
On the other end of the spectrum of 3(16) consumers, there are the risk managers. Some are the belts-and-suspenders types who purchase insurance for everything to mitigate risk. Others just routinely look to off load any risk they can, and because 401(k) plans are often sold with fear tactics about participant lawsuits and DOL fines, they have become convinced that their 401(k) plan (no matter how small) is an albatross around their company’s neck. Of course, there are also the calculating risk managers who examine the potential liability exposure, the probability of having to make a payment and the cost to mitigate the risks.
Many employers fall somewhere in between on the spectrum, but for all of them, 3(16) services represent a good economic tradeoff if their choice is between hiring another half-time or full-time employee to deal with the 401(k) plan or hiring a 3(16) firm. This is particularly true when you compare an inexperienced new hire to a professional 3(16). At the smallest of employers, is the business owner better equipped to review the Form 5500 than a trained 401(k) professional? At a larger employer, is the benefits manager going to be well-equipped to know if the coverage testing information on the record keeper-prepared Form 5500-SUP is correct? It is not irrational for an employer to choose to have an outside 3(16) provider make the final decisions on hardship distributions and QDROs rather than referring each one to outside counsel for review.
The strongest evidence that there is of there being a market for 3(16) services, short of successfully selling the service, is to look at the demand for multiple employer plans (MEPs). Sure, some of the MEP demand was about perceived cost savings, but let’s not kid ourselves. Many employers joined a MEP because they were led to believe that joining a MEP either greatly reduced or eliminated their fiduciary risk on both the administrative and investment side. They were happy they did not have to sign the Form 5500, worry about the Form 8955-SSA or distribute participant notices. When the MEP legislation passes and becomes effective, the interest in MEPs will skyrocket again.
Next time you are listening to your satellite radio, Pandora, etc., take a second to rethink whether a marketplace for 3(16) services exists and whether your firm should be part of it.
Karen Smith is president of Nova 401(k) Associates and a shareholder of Administrative Fiduciary Services Inc.