2018 PENTEGRA
SURVEY Advisors and 3(16) Fiduciary Outsourcing
In August, 2018, Pentegra conducted a survey of retirement plan advisors and their attitudes toward a growing trend in the industry today— ERISA 3(16) Fiduciary Outsourcing. Today, retirement plan administration has become increasingly complex and laden with compliance burdens. For many employers, the commitment of time and energy is overwhelming and too often distracts from the more critical responsibility of running a business. As an advisor, it is a distraction from your business as well. When it comes to the fiduciary oversight of a retirement plan, while most plan sponsors are the Named Fiduciary of their plan, the reality is that they aren’t aware of the myriad of responsibilities that come with that role, or that these responsibilities involve significant risk. Understanding and handling these responsibilities is time away from their business and yours. Time that could be better spent focusing on growth and profitability. For both you and your clients, time is money. There’s an easier way.
Outsourcing.
What makes an ERISA 3(16) fiduciary so important? Contrary to common belief, most plan mistakes that occur have little or nothing to do with the investments or the investment manager, but instead, involve plan administration issues. Some of the top mistakes that occur include:
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Plan document not updated to reflect law changes
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Failure to follow plan terms
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Not using the plan’s definition of compensation for deferrals and allocations correctly
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Employer matching contribution errors
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Not satisfying non-discrimination tests (ADP & ACP)
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Not notifying all eligible employees of their opportunity to defer
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Not complying with IRC Section 402(g)
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Not depositing employee elective deferrals in a timely fashion
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Hardship distribution issues
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Not making required minimum contributions for top-heavy plans
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Not filing a Form 5500 series return and not distributing a Summary Annual Report to all participants.
Fiduciary outsourcing involves the transfer of legal responsibility for a retirement plan from an employer to an institutional fiduciary. By hiring a competent ERISA 3(16) fiduciary, plan sponsors are insulating themselves against these errors to a greater level than a typical third-party administrator TPA arrangement provides.
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Are you familiar with ERISA 3(16) Fiduciary Outsourcing services? 4.71
11.76
83.53
Yes
No
Not Sure
0%
10%
20%
30%
40%
Nearly all advisors surveyed are familiar with
50%
60%
70%
80%
90%
100%
3(16) outsourcing.
A 3(16) Plan Administrator assumes full responsibility for managing the day-to-day operations of the plan, and shifts the legal and operational burdens of the Plan Administrator role from the client to the 3(16) Plan Administrator.
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Have you considered recommending outsourced 3(16) administrator services to your clients? 4.71
11.76
83.53
Yes
No
Not Sure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nearly 84% of advisors surveyed are considering recommending 3(16) administrative services.
The 50 Responsibilities of the Plan Administrator that Can be Outsourced with 3(16) Services
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1.
Overall operational compliance
26.
Segregation of assets by source
2.
Document compliance, mandatory interim
27.
Coverage testing and corrections
amendments, restatements
28.
Involuntary distributions
3.
Form 5500
29.
Episodic notices
4.
Annual plan audit, if applicable
30.
Distributions
5.
New hire processing
31.
Hardship withdrawals
6.
ERISA bond
32.
Qualified Domestic Relations Orders (QDRO)
7.
ACA (automatic enrollment) administration
33.
Lost/missing participants and unclaimed benefits
8.
ACI (automatic contribution increases) administration
34.
Grandfathered plan provisions
9.
Default investment administration
35.
Plan termination and partial termination
10.
Determination of vesting and amount of distribution
36.
Spousal consents
11.
ERISA section 105 employee benefit statements
37.
Survivor benefits, (QJSA and QPSA)
12.
Reasonableness of fees
38.
13.
Prudent selection and monitoring of service providers
Summary Plan Descriptions and Summaries of Material Modifications (SPD and SMM)
14.
Benefit determinations and disputes
39.
Timely remission of deferrals and loan repayments
15.
Administration of beneficiary rules
40.
Timeliness of other required contributions
16.
Worker classification
17.
Nondiscrimination testing
41.
Diversification requirements for plans with employer securities
18.
Summary Annual Report (SAR)
42.
Blackout procedures
19.
Definition of compensation
43.
Defined benefit plan duties
20.
Allocation of unallocated monies by plan year- end
44.
Participant fee disclosure (404a-5)
21.
IRC section 72(p) loan administration
45.
Fiduciary fee disclosure (408b-2)
22.
Contribution calculations and limitations
46.
Records retention under ERISA Sections 107 and 209
23.
Protected benefits
47.
Responding to participant inquiries
24.
Acceptance or rejection of rollovers or transfers
48.
Top-heavy minimum benefit
25.
Annual notices
49.
Overpayments
50.
Personal liability under ERISA
Pentegra Retirement Services
Are your clients receptive to this type of service? 9.76
34.15
56.10
Yes
No
Somewhat
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Most clients are receptive to 3(16) outsourcing services.
Which Employers are a Good Fit for 3(16) Outsourcing? Which types of employers are most likely to be good candidates for 3(16) outsourcing? It is 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 this scenario, outsourcing still frees up staff time that can be reallocated elsewhere, plus, there is a substantial reduction in liability for the employer. However, it may or may not be enough of a pain point for that particular employer to consider outsourcing these responsibilities. On the other end of the spectrum, there are large plans where outsourcing makes perfect sense. High turnover, ill-advised plan design that increases retirement plan burdens, inexperienced staff or understaffed employers all contribute to plan level issues. These are the plans with loan issues, control group issues, the ones that don’t follow the terms of the plan document, or worse, can’t even locate the document. These are the plans where a DOL/IRS audit nightmare is in the waiting.
Inexperienced staff or understaffed employers all contribute to plan level issues.
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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.
positively to any one or combination of these factors, 3(16) outsourcing makes sense
When an employer responds
How Do You Start the 3(16) Outsourcing Discussion with an Employer? 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. A discussion might start with a statement such as, “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.”
It is also quite possible that the business owner is insulated from the day-to-day tasks involved in the operation of their qualified plan, which may require some education on the part of the advisor. In that case, the conversation
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.” might sound like, “Today
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Pentegra Retirement Services
What makes outsourcing services most attractive to clients?
1
Mitigate retirement plan risks
Plan oversight relief
Lessen administrative responsibilities
Reduce plan burdens
Save time
Alleviate work
The Advisor needs to
2
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believe in the value of the employer outsourcing the Plan Administrator duties.
Are you actively discussing this fiduciary outsourcing option with your retirement plan clients? 1.18
23.53
75.29
Yes
No
Not Sure
0%
12
10%
Pentegra PentegraRetirement RetirementServices Services
20%
30%
40%
50%
60%
70%
80%
90%
100%
If so, what percentage of your clients are you in conversations with? 18.67 13.33
18.67
75.29
20.00
Under 10%
10 %- 30%
50%
50 - 75%
Over 75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
75% of advisors surveyed are actively discussing 3(16) fiduciary outsourcing with clients.
A Common Misconception 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 a traditional TPA isn’t meaningful—it is. However, from a workload and liability standpoint, it is not the same thing as outsourcing 3(16) duties to a professional fiduciary.
they have a choice to not be the responsible fiduciary for the Plan Administrator duties. In that case, the conversation might also include, “Today you’ve delegated the operation of your 401(k) to your staff. Tomorrow a professional fiduciary would be responsible. Your name It is also worth noting that most employers don’t realize
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 woud 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 compensation issues, 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.”
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Pentegra Retirement Services
Do your clients understand the difference between a Third Party Administrator (TPA) and 3(16) Administrator? The TPA as 3(16) Fiduciary Administrator A “First” Party Administrator
The TPA and/or recordkeeper—is appointed as the named fiduciary and/or 3(16) administrator.
TPA & Separate Fiduciary
An independent fiduciary is appointed as named fiduciary and/or 3(16) administrator as an added layer in the plan document and other governing documents and contracts. The fiduciary is not the TPA or recordkeeper, but becomes the party responsible for prudently selecting and monitoring the TPA and/or recordkeeper.
The key advantage of this approach is the ability to outsource these responsibilities because under a true 3(16) arrangement, the party doing the work is also the party accepting responsibility for doing it properly.
Under this approach, the TPA—the party doing the actual work—is still not a fiduciary. Non-Fiduciary TPA
The non-fiduciary TPA offers supplemental services such as document mailings or hands-free distribution processing, but does so as a non-fiduciary or accepts very limited fiduciary responsibility for certain tasks only. While this is often a low cost approach, the employer retains the bulk of the legal responsibility and therefore much of the labor and all of the fiduciary responsibility.
Most employers don’t realize they have a choice to not be the responsible fiduciary for the Plan Administrator duties.
How Can You Minimize Plan Related Decisions For Your Client And Make Their Day Job Easier? It is estimated that the average adult makes nearly 35,000 remotely conscious decisions each day. In fact, researchers at Cornell University estimate we make 226.7 decisions each day on food alone. As your level of responsibility increases, so do the multitude of choices you have to make each day. How many remotely conscious decisions about the company retirement plan do your clients make each week? More importantly, are they aware that there is liability attached with every decision that they make as the Named Plan Administrator? What if we could remove those plan
aspects of running their business?
related decisions so the employer can focus on other Wouldn’t that be a no brainer?
Outsource decisions. Reduce liability. Simplify.
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Pentegra Retirement Services
What percentage of your clients are currently utilizing 3(16) fiduciary outsourcing services? 21.52
39.24 39.24
Using
Not Using
Not Sure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
The survey results included in this material were obtained from Pentegra’s 2018 Survey of Retirement Advisors. The survey sample is comprised of the responses of eighty-five respondents of retirement advisors nationwide in August, 2018.
more clients are utilizing 3(16) fiduciary outsourcing than not.
Advisors tell us that
Deliver Added Value for Your Clients As a retirement plan advisor, too often you spend time solving plan administrative issues for your clients. With the addition of 3(16) plan administration services, you can partner with a professional fiduciary to reduce your clients’ responsibilities, duties and liabilities, while saving you time, money and burdens, so you can spend your time growing your practice.
•
Relieve plan sponsors of real work, time and liability; sponsors want to offer a plan, they don’t want
added administrative responsibilities
•
Showcase a way to streamline plan management and save time and money
•
Offer a new solution that’s different than the usual talk about investment funds and fees
•
Focus more of your time on participant retirement readiness and growing your business
Make our nation.
expertise your expertise by partnering with one of the most experienced 3(16) Administrators in the Pentegra offers the platform flexibility to bring your solution together seamlessly.
Pentegra’s 3(16) Fiduciary Administrator services shifts these burdens from your client’s organization to ours. Many providers say they provide 3(16) services. Some take responsibility for a handful of tasks. At Pentegra, we,not only perform these tasks, but also accept responsibility for them. We are a ‘first’party administrator—we provide TPA services and serve as a true 3(16) administrator. Our 3(16) Fiduciary Administrator services allow you to reduce your administrative burdens by not only handing off these tasks to us, but also handing off the responsibility for ensuring that they are handled well. With a 75-year legacy built serving as an institutional fiduciary, Pentegra offers a level of fiduciary protection that is unmatched in the industry. We deliver an unrivaled level of oversight and accept a higher level of responsibility.
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Pentegra Retirement Services
Key advantages to advisors who are able to offer clients 3(16) outsourcing services.
1
Mitigate retirement plan risks
Offer a service that goes above and beyond traditional TPA servicest
Alleviate work for me and my client
3
Relief of plan oversight
Provide clients with a boutique-level service Reduce plan burdens
Save clients time
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Grow Your Retirement Practice with Pentegra. Let us help you achieve your goals.
The Path to Simpler, Safer, Easier Plan Management
For more information on our fiduciary outsourcing, retirement plan or multiple employer plan (MEP) solutions, contact the Pentegra Solutions Center at solutions@pentegra.com or 855.549.6689 or visit us at www.pentegra.com
2 Enterprise Drive, Suite 408 Shelton, CT 06484-4694
800•872•3473 tel 203•925•0674 fax www.pentegra.com © 2018 Pentegra Retirement Services
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