In our last blog about fiduciary outsourcing, we addressed the roles investment fiduciaries. Today we are going to discuss administrative fiduciaries. While the investment line-ups get all the press, one of the more complex thing about a 401k plan is the rules and regulations regarding documents, disclosures, participation requirements, education, and so on.
As we discussed before, the duty of the business owner and plan sponsor is the comply with the regulations and supervise all aspects of your plan, including administration, to the best interest of the participant. Fiduciaries are subject to standards of conduct and have important responsibilities that include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
- Carrying out their duties prudently.
- Following the plan documents (unless inconsistent with ERISA).
- Diversifying plan investments.
- Paying only reasonable plan expenses.
Acting prudently is one of the fiduciary’s central responsibilities under ERISA and requires expertise in a variety of areas, including plan administration. If a plan fiduciary lacks the time or expertise to administer the plan, it may be prudent to hire someone with professional knowledge to assist in fulfilling your fiduciary responsibilities.
So what are your administrative options?
- Go it alone
- Hire a Third-party Administrator (TPA)
- The Partial 3(16)
- Full 3(16)
- 3(16) + Directed Trustee
1. Go It Alone.
This is exactly what it sounds like. You do it all yourself. You create the plan document, approve loans and hardship, send required disclosures, do annual updates, prepare the annual regulatory filings, and anything else that is required to manage a 401k plan.
2. Third-party Administrator (TPA)
This is where a majority of 401k plans land. Plan Sponsors need help with the day-to-day administration of their plan and need someone with expertise to handle the paperwork. Modern TPAs handle much of these tasks for you. The caveat is that often TPAs do not assume a legal responsibility for their work and you are still responsible to the regulators for the administration of your plan.
3. The Partial 3(16)
Think of it as “TPA-plus”. The partial 3(16) may handle the duties of the TPA and provide oversight and auditing of your plan administration in accordance with code section 3(16). Why call it a partial 3(16)? Because in this situation, the provider does not take full responsibility for the oversight and will not fully-indemnify the plan sponsor against claims or deficiencies. The administrator stands with you, but not in place of you.
4. Full 3(16)
A “full 3(16)” performs similar duties and audits as the Partial 3(16) with one big exception. A Full 3(16) administrator will provide the plan sponsor with a contract that includes indemnification language. In this situation, the Administrator assumes responsibility for their work and stands in front of the plan sponsor should there be any claim regarding administration.
5. 3(16) + Directed Trustee
With this option, you get a 3(16) administrator and add a Trustee. An professional trustee becomes the trustee for your plan and is responsible for your plan, including regulatory documents. The outsourced trustee would take the place of an employee or management trustee. As far as administrative outsourcing, this is about as far as you can go.
So what should you do with your 401k plan?
The simplest answer it “it depends”. It depends on how hands-on you want to be with your plan versus how much responsibility you want to outsource to a professional fiduciary. Navigating the options for your 401k plan may seem daunting, but that is where a plan consultant that specializes in retirement plan consulting can help.
Give Six8 Advisors a call today to discuss your retirement plan options.