Marcia S. Wagner, Esq. Customized Service Models for 3(16) Fiduciaries.

Marcia S. Wagner, Esq.

Customized Service Modelsfor 3(16) Fiduciaries

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Agenda

Business Need for 3(16) FiduciariesLegal DefinitionRisks of Serving as 3(16) FiduciaryTypes of 3(16) Fiduciary ServicesLimits on Employer’s Ability to Transfer DutiesBest Practices

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Business Need for 3(16) Fiduciaries

Challenging Consequences of ERISA◦ Imposes high standard of care on fiduciary advisors◦ Same high standard imposed on plan sponsors

Many sponsors do not understand plan administration or ERISA requirements◦ Currently rely on non-fiduciary providers◦ Fiduciary risk for oversight failures

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Plan Sponsor’s Advantage in Hiring 3(16) Fiduciary

“Outsourcing” of 3(16) Duties and Related Risks◦ Plan sponsor formally designates third party as 3(16)

Fiduciary◦ Key 3(16) duties for reporting and disclosure are

transferred◦ Other fiduciary oversight responsibilities may be

delegated◦ Fiduciary duty (and related fiduciary risk) transferred

to third party

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What is a 3(16) Fiduciary?Business Definition

◦ Third party that takes on substantial plan management responsibilities

◦ Employers traditionally retained these dutiesObservations

◦ Business definition refers to a mix of 2 legal roles: - Administrator as defined in ERISA Section 3(16) - Named Fiduciary

◦ Legal definition varies from business definition◦ Scope of third party’s role can vary considerably

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Legal Definition of 3(16) Administrator

“Administrator” Defined in Section 3(16)◦ Special fiduciary designated in plan document◦ Employer is plan’s 3(16) Administrator by default◦ Has ERISA reporting and disclosure duties◦ Does not refer to traditional TPA firms providing non-

fiduciary services

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Reporting and Disclosure Duties of 3(16) Administrator

Special Duties Imposed on 3(16) Administrator◦ Provide SPDs◦ Provide Benefit Statements◦ Provide 404a-5 Participant Disclosures◦ Provide Plan Document (upon request)◦ Sign and File Form 5500◦ Arrange for Plan’s Financial Audit (as necessary)

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Legal Definition of Named Fiduciary

Definition of “Named Fiduciary”◦ Named in plan document◦ Employer traditionally serves in this role

Powers of Named Fiduciary◦ Managing investment menu◦ Administration of plan◦ Engaging service providers

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Employer’s Traditional RoleServes as 3(16) Fiduciary

◦ Plan document designates employer as 3(16) Administrator

◦ Participant disclosures prepared by plan’s TPA, but employer retains ultimate responsibility

◦ TPA prepares Form 5500 and employer reviews/signs◦ Employer must arrange for audit (for large plans only)

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Employer’s Traditional RoleServes as Named Fiduciary

◦ Hires and manages providers, including RK/TPA◦ Oversees plan administration, including compliance◦ Interprets plan and decides benefit claims

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Transferring Duties from Plan Sponsor to 3(16) Fiduciary

“Administrator” Duties◦ Plan document names third party as 3(16)

Administrator◦ 3(16) Fiduciary becomes responsible for reporting and

disclosure requirements under ERISA“Named Fiduciary” Duties

◦ Plan document names third party and employer as Named Fiduciaries

◦ 3(16) Fiduciary assumes significant plan management responsibilities, but not all

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Risks of Serving as 3(16) FiduciaryHigh Standard of Care Imposed Under ERISA

◦ Duty of Loyalty: All decisions must be made solely in interest of participants

◦ Exclusive Purpose: Fees for service providers must be reasonable

◦ Duty of Prudence: Must provide services (including selection of other providers) in a prudent manner

◦ Plan Governance: Plan document must be followed

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Fiduciary Liability and PenaltiesCivil Actions Under ERISA

◦ May be brought by DOL, participants or co-fiduciaries.◦ Breaching fiduciary is personally liable.

DOL Civil Penalty◦ Penalty amount is 20% of applicable recovery

amount.

Excise Taxes

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Co-Fiduciary LiabilityFiduciary may be liable for co-fiduciary’s

breach of duty◦ If knowingly participates in co-fiduciary’s breach◦ If own breach enables co-fiduciary’s breach◦ If knows of co-fiduciary’s breach and fails to make

reasonable effortsImplications

◦ Employer may be liable for 3(16) Fiduciary’s breach◦ 3(16) Fiduciary may be liable for employer’s breach

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Special Liability and Penalty Rules for 3(16) Fiduciaries

3(16) Fiduciary cannot delegate disclosure and reporting duties◦ In traditional arrangements, employer remains

responsible even if error caused by TPASpecial Penalties

◦ Form 5500 Failure - $1,100 per day (DOL penalty)- $25 per day (IRS penalty)

◦ Disclosure Failure - $110 per day

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Mitigating Fiduciary RiskDuty of Prudence

◦ Procedural prudence has protective value◦ 3(16) Fiduciary should have documented policies and

procedures◦ Prudence duty also requires substantive expertise◦ 3(16) Fiduciary should have employees with relevant

expertise

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Types of Services Offered by 3(16) Fiduciary

TPA Serves as 3(16) Administrator◦ TPA agrees to be responsible for participant

disclosures and 5500 filings◦ TPA alone would be responsible for any

disclosure/reporting errors◦ Employer would not have ultimate responsibility◦ TPA’s service agreement may keep employer

responsible for providing accurate information

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3(16) Fiduciary’s Ability to Oversee Other Providers

Oversight of Other Providers◦ 3(16) Fiduciary may hire other providers to assist with

participant disclosures and Form 5500◦ Remains responsible as plan’s 3(16) Administrator and

must oversee providers

Flexibility for TPA Firms◦ TPA firm may provide all related services as 3(16)

Administrator, or hire and oversee other providers

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Responsibilities Transferred to3(16) Fiduciary May Be Limited

Fiduciary responsibilities transferred to TPA may be limited to reporting/disclosure only◦ Plan sponsor remains responsible for all other

Named Fiduciary responsibilities◦ TPA assumes role as 3(16) Administrator only

Illustration◦ TPA agrees to accept ultimate responsibility for

participant disclosures already prepared by TPA◦ TPA agrees to sign 5500 filings already prepared by

TPA

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Other Types of Services Offered by 3(16) Fiduciary

TPA may agree to accept plan management responsibilities as Named Fiduciary◦ Adjudicating benefit claims and disputes◦ Ensuring operational compliance◦ Selecting and monitoring service providers◦ Ensuring plan fees are reasonable◦ TPA is typically not responsible for investments

Scope of Named Fiduciary Responsibilities◦ Will depend on plan document provisions and service

agreement

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Oversight of Plan’s Recordkeeper

Importance of Recordkeeper’s Role◦ Recordkeeper is typically responsible for generating

participant 404a-5 disclosures and statements◦ Also provides website and system for processing

participant transactions◦ 3(16) Fiduciary is responsible for disclosures and may

also be responsible for plan administration

When Plan Sponsor Hires Recordkeeper◦ 3(16) Fiduciary should require use of approved

recordkeeper to ensure plan runs properly

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408(b)(2) Fee Disclosures of Recordkeeper

When 3(16) Fiduciary Hires Recordkeeper◦ Recordkeeper must provide 408(b)(2) fee

disclosures to 3(16) Fiduciary◦ Plan Sponsor should consider requiring 3(16)

Fiduciary to disclose recordkeeper’s fees◦ Should also confirm 3(16) Fiduciary is not hiring

affiliated recordkeeper or receiving “kickbacks”

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3(16) Fiduciary’s Non-Fiduciary Services

Types of Non-Fiduciary Services◦ 3(16) Fiduciary may offer bundled recordkeeping and

TPA services◦ May also offer TPA services only

When Offering TPA Services ◦ 3(16) Fiduciary must coordinate its TPA services with

recordkeeper’s administrative services◦ Areas of potential overlap include preparation and

delivery of disclosures, loans and withdrawals

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When 3(16) Fiduciary Hires Non-Fiduciary Providers

Relationship with Other Service Providers◦ 3(16) Fiduciary’s duties as 3(16) Administrator include

hiring accounting firm for audit as necessary◦ Additional duties may including hiring non-fiduciary

service providers (e.g., recordkeeper)

Accountability of 3(16) Fiduciary◦ 3(16) Fiduciary has duty to prudently select and

monitor provider on ongoing basis◦ Not accountable for individual errors of provider, but

responsible for prudent selection and monitoring

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Customizing TPA Firm’s 3(16) Fiduciary Services Model

Determining TPA’s Fiduciary Services◦ May accept responsibility for 5500 reporting and

disclosures as plan’s Administrator◦ May also accept comprehensive management

responsibilities as plan’s Named Fiduciary◦ Illustration: TPA agrees to adjudicate benefit claims

Consider TPA’s Expertise and Procedures◦ Prudent process must be established for each

fiduciary service◦ Illustration: Benchmarking review conducted to

satisfy TPA’s duty to evaluate reasonableness of fees

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Limits on Employer’s Ability to Transfer Responsibilities to 3(16) Fiduciary

3(16) Fiduciary may accept broad role as both 3(16) Administrator and Named Fiduciary◦ But employer cannot eliminate all fiduciary oversight

responsibilities.◦ Employer typically remains responsible for plan

investments (or hiring 3(38) investment manager)

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Employer’s Duty to Monitor 3(16) Fiduciary

Plan sponsor remains liable for monitoring 3(16) Fiduciary.◦ Employer’s authority to amend plan document

represents power to replace 3(16) Fiduciary.◦ Employer should review performance of 3(16)

Fiduciary at reasonable intervals.◦ No need for employer to monitor other providers if

responsibility transferred to 3(16) Fiduciary.

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Other Responsibilities Retained by Plan Sponsor

Coordination of Fiduciary Responsibilities◦ Any responsibilities not accepted by 3(16) Fiduciary

remain with Plan Sponsor◦ 3(16) Fiduciary’s agreement and plan document

should be reviewed to confirm responsibilities

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408(b)(2) Fee DisclosuresFee Disclosure Requirements

◦ 3(16) Fiduciary must describe services and fees◦ Must also identify any subcontractors and disclose

their compensation◦ Description of services should be consistent with

plan document and service agreement

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Suggested Best Practices:Scope of Fiduciary Services

Level of 3(16) Fiduciary Responsibility ◦ Offer fiduciary service only if prudent process can

be established and followed◦ Document selection and monitoring criteria when

hiring other providers◦ Prepare regular reports of other providers’ services

Advisability of Different Service Levels◦ Simpler and easier to provide uniform level of

fiduciary oversight across all plan clients

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Suggested Best Practices:3(16) Contractual Considerations

Service Agreement for 3(16) Fiduciary◦ Should state which responsibilities will shift to TPA◦ Should confirm that Plan Sponsor remains

responsible for hiring 3(16) Fiduciary◦ Plan Sponsor should remain responsible for

providing complete and accurate information

Coordination with Plan Document◦ Confirm Administrator and Named Fiduciary

provisions are consistent with agreement◦ Plan document may provide that both TPA and Plan

Sponsor will serve as Named Fiduciaries

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Suggested Best Practices:Monitoring Support for Plan Sponsor

Employer’s Duty to Monitor 3(16) Fiduciary◦ Must monitor 3(16) Fiduciary’s performance at

reasonable intervals◦ Plan Sponsor should ask for regular updates

Illustration◦ 3(16) Fiduciary provides updates on annual basis◦ Updates include summary information of:

(1) number of benefit claims adjudicated(2) exception reports identifying potential

issues(3) performance assessment of other providers(4) benchmarking analysis

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ConclusionsImportant Considerations

◦ There is a business demand for 3(16) Fiduciaries◦ 3(16) Fiduciaries provide services as a plan’s 3(16)

Administrator and Named Fiduciary◦ Fiduciary risks may be mitigated through procedural

prudence and substantive expertise◦ Certain limited duties cannot be transferred from plan

sponsor to external 3(16) Fiduciary◦ But TPA firms still have substantial freedom to adopt

customized 3(16) Fiduciary service models

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Important InformationThis presentation is intended for third party administrators and other service providers to 401(k) plans and other retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA).

This information is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or its affiliates.

Marcia S. Wagner, Esq.q.

99 Summer Street, 13th FloorBoston, MA 02110

Tel: (617) 357-5200

Website: www.wagnerlawgroup.com

[email protected]

A0147439

Customized Service Modelsfor 3(16) Fiduciaries