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3(16) Services:Should I or Shouldn’t I?
Ilene H. Ferenczy, Esq., CPC, APA Managing Partner
Ferenczy Benefits Law Centeriferenczy@ferenczylaw.com
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Agenda
• Quick review of 3(16) concept – what it is and what it means
• Types of 3(16) services that are being provided in the marketplace
• What will you do differently?
• Billing …
• Pitfalls … and why they happen
• Final thoughts and recommendations
• Questions
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THE 3(16) CONCEPT –IN FIVE MINUTES OR LESS
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“Normal” Plan Operations
• The plan administrator is responsible for the
plan’s operations (as opposed to the investment
fiduciary, who is responsible for the money side)
• Plan administrators get operational advice from
TPAs in the same way that investment fiduciaries
get investment advice from financial advisers
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Professional 3(16) Plan Administration
• The plan sponsor is commonly looking to delegate the administrative responsibilities that are outside his/her ken to another fiduciary who knows what s/he is doing
– Analogous to hiring an investment manager versus investment adviser
– Plan sponsor responsibility goes from full fiduciary obligations to hiring/monitoring the responsibilities
• The 3(16) TPA is the replacement administrative fiduciary
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What Is the Structure for TPA-Provided 3(16) Administration?
PLAN SPONSOR OR COMMITTEE REMAINS
THE NAMED PLAN ADMINISTRATOR
• “Normal” P.A. remains primarily liable– Must prudently delegate and
monitor
• Some fiduciary duties are delegated to TPA– Must perform services
prudently with proper fiduciary care
TPA BECOMES THE NAMED PLAN
ADMINISTRATOR
• TPA takes on alladministrative fiduciary responsibility (and liability)
• TPA delegates back to “normal” P.A. or someone else those things it will not do– Must prudently delegate and
monitor
– WHY WOULD YOU DO THAT?
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If “Normal” P.A. Delegates to TPA
• Need delegation document– Can be “woven into” services
agreement
– Should be very specific, thereby forestalling liability for items not delegated
• This document is where the TPA:– Takes on what it wants to take on
– Avoids anything it wants nothing todo with
– Moderates its liability to the extent permitted by ERISA
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Important Overarching Concerns
• A 3(16) TPA is a fiduciary
– Must be prudent, follow exclusive benefit rule, follow the plan documents
– You are liable for losses to the plan caused by your breach of fiduciary duty
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Overarching Concerns
• A 3(16) TPA is a cofiduciary
– You are also liable for losses caused by the breach of dutyof another fiduciary if you:
• Participated or covered up the breach
• Facilitated the breach by breaching your duties
• Knew about the breach and did nothing to remediate
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TYPES OF 3(16) SERVICES BEING PROVIDED IN THE MARKETPLACE
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There Is an Infinite Number of3(16) “Flavors”
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High Service 3(16)
Mid-Service 3(16)Low Service 3(16)
Different Strokes …
• “High Service” 3(16)
– You come as close to replacing the “Normal” P.A. as is physically possible
– Very common in MEP situations
– High level of discretion
– Commonly hire/oversee other advisers
– You are the “go-to-guy” for the participants and beneficiaries
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Different Strokes …
• “Medium Service” 3(16)
– You share responsibilities with the plan sponsor, taking on only that with which you are comfortable
– Nonetheless, you partner to provide services
– You may help with governance
– You may be the “voice” of the plan to the participants
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Different Strokes …
• “Low Service” 3(16)
– You limit your services
– Distributions
– Loans
– ADP/ACP refunds
– 5500 signature
– ???
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How to Decide
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Desire
Expertise
Client demand
Level of commitment
Financial demands
Available personnel
Other …
See Checklist …
WHAT WILL YOU DO DIFFERENTLY?
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Company Structure
Will you set up a separate company to do 3(16) work?
– If so, is this just company structure or will it really be separate?
• Personnel
• Computers and data
• Clientele
• Office space
– Reasons why or why not …
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Procedures and Systems
What are your clients getting from your 3(16) services that they don’t get from your regular services (and why should they pay you extra)??
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Clientele
Will you only do 3(16) work for your normal TPA clients or will you provide 3(16)-only services?
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Selection
Will you provide only one type of 3(16)
services or will you provide a range of
options to fit different clients’ desires and
needs?
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BILLING
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Options We’ve Seen
• General increase in billable rates
– In “base fee”
– In relation to specific tasks
• Basis point charges
• Additional participant charges
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PITFALLS
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Pitfall #1
Improper documentation of the relationship, creating
disagreement with the client and liability where it wasn’t
intended
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Pitfall #2
Not creating systems to control quality and limit
liability
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Pitfall #3
Selling what you can’t do
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Pitfall #4
Not being committed to doing it … but
doing it anyway
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FINAL THOUGHTS AND RECOMMENDATIONS
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• If you don’t want to do it, don’t do it (and don’t be bullied into doing it).Don’t do
• If you are going to do it, do it right.Do
• Measure the risk and rewards (and price it right and get insurance).Measure
• Don’t be overly casual about it (but don’t make yourself crazy, either).Don’t be
• Don’t provide a product you’re not proud of.Don’t provide
Questions?
Contact Information
Ilene H. FerenczyFerenczy Benefits Law Center2635 Century Parkway, Suite 200
Atlanta, Georgia 30345
(678) 399-6602 (V)
(866) 515-5140 (toll free)
(404) 320-1105 (F)
ilene@ferenczylaw.com
Follow us on Twitter: @ferenczylaw
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2018 ASPPAWinter Virtual Conference
Thursday, December 69:00 am to 5:00 pm
Five Sessions Including:Washington Update and Late-Breaking Regulatory Developments
Ask the Experts Panel
Visit: www.asppavirtualconference.org
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