3(16) Fiduciary Services
A 3(16) fiduciary is a service provider hired by an employer to manage the day-to-day administrative work for a 401(k) plan.
Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. The fiduciary status is based on the functions performed for the plan, not just a person’s title. A plan sponsor is a fiduciary as well as the individual trustees. A fiduciary must put the participants’ and beneficiaries’ interests first by providing the highest standard of service and care. A plan fiduciary is expected to be extremely loyal to the plan and a breach of that fiduciary duty may involve personal liability.
Since the duty of a plan fiduciary is extremely important, plan sponsors need to hire plan providers that will help minimize that potential liability. One of the ways to minimize that liability, other than using best practices, is to hire a plan provider that will serve in a plan fiduciary capacity. Having a provider serve as a fiduciary is a great way for the plan sponsor to spread the responsibility and liability should they be sued by plan participants.
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 are:
- Plan document not updated to reflect law changes
- Failure to follow plan terms
- Not using the plan’s definition of compensation for deferrals and allocations correctly
- Employer matching contribution errors
- Not satisfying non-discrimination tests (ADP & ACP)
- Not notifying all eligible employees of their opportunity to defer
- Not complying with IRC Section 402(g)
- Not depositing employee elective deferrals in a timely fashion
- Not conforming to the plan document and IRC 72(p) for participant loans
- Hardship distribution issues
- Not making required minimum contributions for top-heavy plans
- Not filing a Form 5500 series return and not distributing a Summary Annual Report to all participants