3(16) Administrator? Don’t Underestimate the Importance of the Plan Document!

If you are a 3(16) plan administrator, one of the keys to success — if not survival — is to know what your responsibilities are. And where can that be found? “Where it really lies is the plan document,” says Ilene Ferenczy of the Ferenczy Benefits Law Center. She made her remarks at an Oct. 26 session of the ASPPA Annual Conference at National Harbor near our nation’s capital.

That all-important enumeration of plan administrator responsibilities is not found in ERISA, nor is it found in the Internal Revenue Code, Ferenczy said. Rather, it is the plan document that defines who the plan administrator is and identifies his or her responsibilities and rights. In fact, a plan document must permit the plan sponsor to appoint a plan administrator.

Why is this important? “Employers have no idea what their duties are as plan administrator,” said Ferenczy, who added that they are also frightened of fiduciary liability for plan investments. Consequently, Ferenczy noted, “many people in the benefits industry believe that plans would be administered more efficiently if a professional did the work.”

ERISA Section 3(16) signifies the importance of the plan document in defining the term administrator, Ferenczy noted. It states that the administrator is the person the plan specifically designates for that role. The tax code also says that the plan specifically designates who the plan administrator is.

Enter the third party administrator as a plan administrator. Client employers look to the TPA for professional plan management, better avoidance of disqualifying failures and a better program for their employees. The good news for TPAs: Clients are willing to pay for all that. The flip side: it means that the employer delegates to the TPA the fiduciary responsibility for certain plan management tasks.

But Ferenczy noted that except in extraordinary circumstances, the TPA is not in a position to handle all the potential responsibilities of a plan administrator. How to address that? “Identify the things you are not in a position to do. Then identify the things you don’t want to do,” she suggested.

Plan sponsors need to be careful as well. “You are always, as a plan sponsor, retaining some responsibility,” Ferenczy cautioned. She observed that when selecting a TPA, among the factors they should consider are the credentials of the TPA and its staff members, the size of the staff and their education level, and whether the TPA is insured.

And they need to define who the plan administrator is, and what that individual does, in writing. “The services agreement is of key importance,” she said.

More caution: Ferenczy warned attendees to watch out for “off the rack” documentation. “I have found that the client generally does not know what the responsibilities are when these are used,” she said. Ferenczy also emphasized the importance of reading contracts. “Many plans do not read contracts,” she observed.

Above all, a 3(16) administrator must remember that he or she is a fiduciary. “You’re in it for the long haul,” she noted. “The absolute first line of defense is you.”