Current Thinking

3(16) Fiduciary Outsourcing. It’s A No Brainer

A blog by Joe Reese, Regional Director, Pentegra

When does 3(16) outsourcing make sense for an employer? How do you determine whether an employer is a good fit for this type of arrangement? In recent conversations with advisors, the frequency of these questions made me realize that it was a timely topic for a blog, so I took the opportunity to share the three questions that I get asked the most when it comes to 3(16) fiduciary outsourcing.

1.  Which Employers are a Good Fit for Full 3(16) Outsourcing?

This question came up in a conversation with an advisor a few days ago: What types of employers are most likely to be good candidates for full 3(16) outsourcing? Often the Advisor is wondering if a particular plan size is a ‘sweet spot’ for 3(16) outsourcing. However, it’s less about the size of the plan than the needs of the plan.

There are employers on the smaller end of the spectrum that run a tight ship and have tenured, experienced staff responsible for the daily administration of their retirement plan. Even in the scenario I just described, outsourcing still frees up staff time that can be reallocated elsewhere, plus there’s a substantial reduction in liability for the employer. But it may or may not be enough of a pain point for that particular employer.

On the other end of the spectrum, we see large plans that are, quite frankly, a mess. High turnover, ill-advised plan design that increases their retirement plan burdens, inexperienced staff or understaffed employers all contribute to the issues. We’ve fixed too many of these plans to remember them all. These are the plans with loan issues, control group issues, the ones that don’t follow the terms of the plan document…or worse, the employer can’t even locate the document.  These are the plans where a DOL/IRS audit nightmare is in the waiting.

While there isn’t a set-in-stone answer as to which employers are a good fit, there are a few things to look for:

  • That there are enough participants for it to matter. More participants equal more plan activity, more things for employer’s staff to do.
  • That things are being done correctly is important to the employer. There’s only one way to run a retirement plan – the right way. If the employer isn’t one to cut corners and expects things to be done the right way, then getting the Plan Administrator duties right will mean something.
  • That the employer has limited resources and/or sees the value in not having employees spending time on plan minutiae. As important as human resource functions are, many companies do not have a dedicated staff. That means employees are wearing many hats.
  • For the employer who values someone else assuming these responsibilities, outsourcing duties that carry substantial legal liability would make good sense. It’s not just about having someone else do it for you, it’s also having the other party take responsibility for it. The employer who gets the value of not being responsible—of limiting liability—will appreciate the value of Plan Administrator duties being outsourced.

When an employer responds positively to any one or combination of the above, full 3(16) outsourcing is a no brainer.

2. How Do You Start the 3(16) Outsourcing Discussion with an Employer?

“I like the idea of total 3(16) outsourcing – any suggestions on how to start that conversation with a business owner?”  To help me answer this question, I asked for advice from a long-time mentor and expert advisor who has embraced 3(16) outsourcing as an important part of his advisory practice.

First, it starts with the Advisor. The Advisor needs to believe in the value of the employer outsourcing the Plan Administrator duties—and have a genuine desire to solve client problems by seeing their plan run with less risk, and more efficiency than they’re experiencing today.

Therefore, the discussion might start something like, “Our retirement plan advisory practice has been built upon a genuine desire to see plans run with less risk and more efficiency for the employer and with participants having better outcomes than they’re getting today. We’re doing things that many employers like you are finding to be great solutions and big improvements for them personally, for their business, and their employees.”

Keep in mind, it’s quite possible the business owner is insulated from the day-to-day tasks involved in the operation of their qualified plan, which may require some educating on your part.

“Today your staff is responsible for required notices to new employees and existing participants, loans, reviewing/approving/documenting hardships, tracking down – and keeping track of – terminated employees, keeping documents updated…AND making sure these are done correctly and on time – to name just a few of the 50+ chores associated with the operation of your plan.” 

Many employers likely believe they’ve already “outsourced” these duties to their third party administrator (TPA) when, in reality, they’ve only obtained clerical help from a non-fiduciary service provider who leaves a wide range of responsibilities on the employer’s plate. This isn’t to suggest the work of the TPA isn’t meaningful—it is. However, from a workload and liability standpoint, it’s not the same thing as outsourcing 3(16) duties to a professional fiduciary.

It’s also worth noting that most employers don’t realize they had a choice to not be the responsible fiduciary for the Plan Administrator duties.

“Today you’ve delegated the operation of your 401(k) to your staff. Tomorrow a professional fiduciary would be responsible. Your name comes off the 90+ page legal document. While retaining a limited number of responsibilities as the plan sponsor, the professional fiduciary is responsible for operating your plan, making sure it’s complying with all of the Federal regulations governing employer-sponsored retirement plans.

Wouldn’t you rather outsource these tasks to someone else who will own them and take responsibility?  In addition, you’d be shielding your staff from personal liability which they are subject to today.  Your employees are free to apply that time and effort to other much needed work – healthcare, wellness programs and other employee benefits; workers comp, sales and marketing, the running of your business…How would that sound to you?”

And the preferred response would be, “That’s a no brainer.”

3. How can you minimize plan related decisions for your client and make their day job easier?

According to multiple sources on the Internet, the average amount of remotely conscious decisions an adult makes each day equals about 35,000.  Researchers at Cornell University found that people make an average of 226.7 decisions a day about food alone1 which, quite honestly, seems a bit low to me.

Steve Jobs wore a black turtleneck every day. Mark Zuckerberg wears a grey tee shirt.  When asked why, he said, “I really want to clear my life to make it so that I have to make as few decisions as possible…I feel like I’m not doing my job if I spend any of my energy on things that are silly or frivolous about my life.” While I’m not equating my decisions to those made by a Jobs or Zuckerberg, some time ago I decided to only wear navy or gray suits, blue shirts, and striped ties for business meetings. Admittedly, part of the reason was because I’m terrible at matching clothes. But it was also an effort to make fewer decisions – to simplify. Being well dressed is important – but at some point decisions regarding what to wear provides diminishing returns…there are more important decisions for me to spend time on.

How many remotely conscious decisions about the company retirement plan does an employer’s staff make each week? Unlike my decisions about what color shirt or tie to wear, a Plan Administrator’s decisions are not “silly or frivolous.” In fact, there is liability attached to these decisions. What if we could remove those plan related decisions so the employer can focus on other aspects of running their business? Wouldn’t that be a no brainer?

Outsource decisions. Reduce liability. Simplify your life.

1Wansink, Brian and Jeffrey Sobal (2007), “Mindless Eating: The 200 Daily Food Decisions We Overlook,” Environment and Behavior 39:1, 106-123

2Mark Zuckerberg, November 7, 2014, Q&A Session, Facebook Californian Headquarters

About the Author

Joe Reese is Regional Director at Pentegra, where he spearheads the organization’s business development efforts throughout Eastern Pennsylvania, Delaware, Maryland and Virginia, including Washington D.C. An accomplished financial services industry veteran, Joe enjoys discussing fiduciary issues and is a valued resource for Pentegra’s advisor-partners. Pentegra’s long history as a fiduciary service provider, conflict-free open architecture investment platform and flexible, fiduciary outsourcing solutions allow him to bring an independent perspective and maximum flexibility to every opportunity. For more information or to share your fiduciary questions with Joe, contact him at Follow Joe on LinkedIn: Joseph Reese


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