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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