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Is Becoming a 3(16) Plan Administrator Worth it?

Editor’s Note: This is the second of a three-part series by Peter Preovolos on being a 3(16) plan administrator. The first addressed the growing interest in the third party administrator (TPA) community about offering 3(16) plan administrator services to our clients.

Some TPAs are looking at 3(16) plan administrator services as a means to increase fees. Others see them as a way to create a compelling point of differentiation for their businesses. A small handful has even begun offering these services in a modified format to help ensure the plan’s overall compliance and success. But finding the qualified personnel to make this big leap and all the increased responsibilities that go along with it, is not easy.

As someone who has been operating as a named fiduciary to clients for years, I see several other drawbacks as well:

  • Lack of resources. Currently, few TPAs — especially solo practitioners and smaller companies — have the infrastructure or trained staff to take on the duties and responsibilities of a true 3(16) plan administrator.
  • Risk of client turnover. Every time a client gets a new CFO, controller or head of human resources, you have to work twice as hard to keep your position as plan administrator. New hires typically like to bring on people they know and trust and they may not see the value in your services.
  • Greater liability risk. Being a 3(16) plan administrator carries a lot of liability. My recommendation would be to carry a lot of insurance and hope you never have a claim. Furthermore, the day may soon come when insurance underwriters will either refuse to renew your coverage or raise the premiums to astronomical levels.
So far, I have seen only a handful of TPAs accept the role of full 3(16) plan administrator. Instead, most of those serving in this capacity are limiting the contractual services they agree to provide and accept fiduciary liability for. Which strikes me as telling people you’re a “little” pregnant. If you agree to accept fiduciary responsibility — even a little — you had better be prepared to blow the whistle if you see, notice or even believe there’s a problem in any other areas of the ongoing plan administration.

If something happens and you’re not prepared, the argument that your expertise lies only in those areas carved out in the agreement will not offer a very good defense. Remember, Section 405 of ERISA states if you know or should have known that another fiduciary of the same plan has acted improperly, then you have a duty to blow the whistle on behalf of the plan. Fiduciaries can be held personally liable if they participate in another fiduciary’s breach, conceal the breach or do not act to correct it.

When I served as president of the San Diego Employees Retirement System, those appointed as fiduciaries over the system didn’t seem to recognize their liability. Moreover, it had no impact when the previous trustees were all sued for failing to manage their duties appropriately — even though some of them went bankrupt trying to defend themselves. Apparently, the current trustees didn’t think it could happen to them.

When my term on the board expired, I served an additional two years because it took the city that long to find someone to replace me. Why? Because no one wanted the liability or exposure. Board members and elected officials could not understand why I refused to vacate my position until I was officially replaced. But I stuck around because I felt it was the right thing to do to protect myself and the many positive changes to the retirement system I helped implement.

So that’s my cautionary tale about the risks of accepting fiduciary responsibilities. And there’s another issue (which no one seems to be talking about) that should also give you pause for reflection. In Part Three of this series, I will discuss whether or not a market for 3(16) plan administrator services even exists. I’m not convinced it does, but we don’t have room for that discussion here.

Peter E. Preovolos is CEO of PenChecks Trust.