What Is a 3(16) Fiduciary?

Managing a company retirement plan involves numerous administrative tasks that can be complex and time-consuming. This is where a 3(16) fiduciary comes into play. Named after section 3(16) of the Employee Retirement Income Security Act (ERISA), this specialized fiduciary takes on the legal responsibility for administering an employer’s retirement plan. Unlike other plan professionals, a 3(16) fiduciary assumes direct liability for plan operations, handling everything from participant enrollment and distributions to government filings and compliance testing. By delegating these responsibilities to a 3(16) fiduciary, employers can reduce their own liability exposure while ensuring their retirement plans remain compliant with federal regulations.

Some financial advisors have the experience and knowledge necessary to serve as a plan fiduciary.

3(16) Fiduciary Explained

A 3(16) fiduciary is a service provider responsible for managing the day-to-day operations of retirement plans. Typically, these service providers are hired by small to medium-sized businesses (SMBs) looking for help managing their plans.

3(16) refers to a section of the Employee Retirement Income Security Act of 1974 (ERISA) which defines plan administrators. This is similar to the 401(k), which gets its name from the section of the U.S. tax code that established the plan.

In the context of finance, a fiduciary is a person or firm responsible for managing property or assets on the behalf of someone else. Fiduciary responsibility requires the asset manager to act in the client’s best interests, rather than in their own interest or the interest of their company.

Advantages of a 3(16) Fiduciary

Partnering with a 3(16) fiduciary can significantly lighten your company’s administrative load. These specialized professionals take over time-consuming plan administration tasks that would otherwise fall on your HR or benefits team. By delegating responsibilities like eligibility tracking, distribution processing and required notifications, your internal staff can focus on core business functions rather than getting bogged down in complex retirement plan paperwork.

One of the most compelling advantages of a 3(16) fiduciary is their ability to help shield your organization from compliance pitfalls. These experts stay current with ever-changing ERISA regulations and ensure your retirement plan meets all legal requirements. When you work with a qualified 3(16) fiduciary, they assume legal responsibility for the administrative functions they manage, potentially reducing your company’s liability exposure for administrative errors or oversights.

Plan administration requires meticulous attention to detail. A 3(16) fiduciary brings specialized expertise to ensure your retirement plan operates with precision. They implement rigorous verification processes for contributions, maintain accurate participant records, and ensure timely processing of all plan transactions. This professional oversight typically results in fewer errors, cleaner compliance testing and a more efficiently run retirement benefit for your employees.

Types of Retirement Plan Fiduciaries

There are three main types of retirement plan fiduciaries: 3(38), 3(16) and 3(21) fiduciaries. The 3(16) fiduciary established by ERISA is responsible for the day-to-day operations of retirement plans. ERISA also established 3(21) and 3(38) fiduciaries, responsible for overseeing the plan’s assets or investments.

Some individuals become retirement plan fiduciaries through their actions rather than formal designation. Anyone exercising discretionary authority over plan management, administration or assets may be considered a functional fiduciary. This status applies regardless of title and carries the same legal responsibilities as named fiduciaries.

There are many responsibilities that come with retirement plans, and not all 3(16) fiduciaries provide the same set of services. Thus, employers should understand exactly what the fiduciary provides, and they may need more than one type of fiduciary, depending on the level of assistance necessary.

3(16) Fiduciary Responsibilities

To understand exactly what a 3(16) fiduciary does, we must take a closer look at their responsibilities. As mentioned earlier, these fiduciaries are responsible for the day-to-day operations of the retirement plan. Some of these responsibilities might include:

Signing and filing Form 5500 each year, as needed
Determining plan eligibility
Issuing disclosures and statements to employees
Updating personal information
Approving and processing distribution paperwork
Onboarding and offboarding employees
Processing plan changes

These are just a few examples of common responsibilities, but there may be many more. Form 5500 is one that informs the IRS and Department of Labor about the terms of the retirement plan. This step is necessary to ensure the plan complies with government regulations.

As you can see, there is a lot of work that must happen behind the scenes to manage a retirement plan. The result is that 3(16) fiduciaries become invaluable. They reduce the employer’s responsibility, both legally and in terms of the work of managing the plan.

Payroll Management of 3(16) Fiduciaries

Another thing 3(16) fiduciaries must grapple with is payroll data. As one can imagine, payroll data can quickly become a data overload. Not only that, but errors can be common. And in many cases, those errors are nothing especially complicated. For example, the last name might be spelled incorrectly, or a birth date might be wrong.

These errors happen all the time, but they must be corrected before payroll can be processed correctly. Failing to do so would be costly for the plan. Thus, the 3(16) fiduciary is left to correct these errors.

TPA vs. 3(16) Fiduciary

Employers might hire bookkeepers and third-party administrators (TPAs) to help manage retirement plans. Given that section 3(16) of ERISA establishes the plan administrator, one might think TPAs and 3(16) fiduciaries are the same. However, while their responsibilities may overlap, they play distinct roles.

TPAs may perform many of the same duties as a 3(16) fiduciary, such as creating retirement plan documents, preparing employer and employee benefit statements and processing plan distributions.

The biggest difference is that when an employer hires a TPA to help manage a retirement plan, the employer remains in control of the plan while delegating some duties to the TPA. A 3(16) fiduciary, on the other hand, takes full control of the retirement plan. However, as noted earlier, some 3(16) fiduciaries only perform certain duties and will leave the rest for the employer to handle on their own or to outsource to another fiduciary.

Bottom Line

A 3(16) fiduciary plays a crucial role in retirement plan administration, taking on significant responsibilities that help employers manage their ERISA compliance obligations. By delegating administrative duties to these specialized professionals, companies can reduce their liability exposure while ensuring their retirement plans operate according to strict regulatory standards. The decision to hire a 3(16) fiduciary should be carefully considered, weighing the benefits of reduced administrative burden and minimized compliance risk against the costs of these services.

Tips for Retirement

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