Under ERISA, those who administer, manage, or control plan assets have a fiduciary duty to plan participants. This fiduciary duty requires them to act solely in the interest of plan participants and beneficiaries. It is important for plan fiduciaries to understand their roles and responsibilities in deciding whether to outsource some of the administrative tasks to a 3(16) administrative service provider.
Section 3(16) of the Employee Retirement Income Security Act of 1974 (ERISA) establishes the role and responsibilities of plan administrators. In recent years, fiduciary service companies have begun offering fiduciary services to plan providers, including taking on fiduciary responsibility for investments.
However, because this is a relatively new offering, many companies are hesitant to turn over fiduciary duties to companies without a long track record of providing fiduciary services. The Department of Labor (DOL) has offered some guidance in the developing area of outsourcing employment benefit plan fiduciary services.
Administrative outsourcing to third-party service providers to act as the named administrator in plan documents can reduce administrative tasks for employers. Administrative outsourcing can involve:
- Supervisory administrator who hires a Third Party Administrator (TPA) but does no plan administration;
- Working administrator named as such in plan document and does the administration themselves;
- Co-administrator who divides the administrative tasks with the employer;
- Administrative fiduciary who performs certain ERISA Section 3(21) fiduciary functions;
- Non-fiduciary recordkeeper or TPA who offers other administrative services; or
- Multiple Employer Plan (MEP) fiduciaries.
Employers who outsource administrative services must still take steps to avoid crossing the line into acting as a fiduciary. Just because an employer has a professional TPA does not automatically mean they can avoid fiduciary status. Certain activities could mean an employer is considered a fiduciary, which could expose them to fiduciary liability even if there is a TPA or other professional fiduciary. Indeed, the mere decision by an employer to outsource fiduciary functions is itself a fiduciary function, and the employer has an ongoing fiduciary obligation to monitor those they appoint to serve as plan fiduciaries. Employers should review their plan administrative activities to be sure to avoid any fiduciary liability.
Employers should also review the qualifications of TPA service providers. However, especially given the relatively new area of 3(16) administrators, most providers will necessarily not have extensive experience providing these novel services. Additionally, failing to monitor or lack of due diligence in selecting a professional fiduciary could also expose the employer to liability. It is important for employers to understand the roles and responsibilities of fiduciaries to ensure there is a clear delineation between the employer's role and the service provider's role.
The IRS and Department of Labor provide guidance on ERISA fiduciary duties. Additionally, there are a steps employers can take to limit potential liability. This includes proper decision-making documentation and selecting qualified third-party service providers to handle fiduciary investment decisions and plan management, and continually monitoring those service providers.
If you have any questions about retirement plan administration outsourcing and ERISA compliance, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits. Our firm can provide fiduciary counseling, help you avoid ERISA penalties, and represent you in ERISA litigation. Contact our office today with any questions on how we can help you and your business succeed.