What is a 3(16) fiduciary? When to consider a plan fiduciary

5 MIN READEditorial Policy

Key Takeaways

  • The “3” in 3(16) comes from ERISA, which outlines the legal obligations of a 401(k) fiduciary

  • A 3(16) fiduciary must ensure that a 401(k) plan is created and managed according to specific requirements

  • Employers may hire a 3(16) Fiduciary Services Provider to fulfill certain duties that plan sponsors may find demanding

Do you know your fiduciary responsibility as a 401(k) plan sponsor? If you’re unsure, you may not be alone.

An Alliance Bernstein survey from 2019 found that only 44% of respondents were certain of their fiduciary status, while roughly 6% said they didn’t know or weren’t sure. The survey also suggests that fiduciary awareness may be declining. In 2011, 61% of respondents knew they were fiduciaries—which marks a 17% drop over eight years. 

So, what does it mean to be a 401(k) plan fiduciary? This article aims to help make plan sponsors more aware of their legal obligations of being one, and the benefits of appointing a 3(16) Fiduciary Services Provider. 

Defining a 401(k) plan fiduciary

ERISA, the Employee Retirement Income Security Act of 1974, outlines several duties that a fiduciary performs for a 401(k) plan. These responsibilities include ensuring that:

  • Fees are reasonable and not excessive,

  • Terms outlined in plan documents are followed,

  • Investments are diversified, and

  • Decisions about the plan and investments are made in the best interests of participants (and their beneficiaries).

Key takeaway: If an employer fails to act in a way that upholds fiduciary duty, for example, by failing to make decisions in the best interest of their employees, they may be held personally liable.

Advantages of appointing a 3(16) Fiduciary Services Provider

An employer hires a 3(16) Fiduciary Services Provider to function as a “Plan Administrator,” who fulfills a comprehensive set of duties that many plan sponsors find demanding, including keeping the plan in compliance with ERISA guidelines (compliance failures can be costly). 

Hiring a 3(16) Fiduciary Services Provider allows the sponsoring employer to delegate some fiduciary responsibilities, and limits their fiduciary responsibility, as well as the overall administrative burden of operating a plan. There are other types of fiduciaries under ERISA, all of which have varying responsibilities. Read more about different 401(k) fiduciary types. 

Each service provider may offer a different level of 3(16) fiduciary services they’ll perform on behalf of an employer, including those that place a lot of demand on employers:

  • Reducing an employer’s liability. 3(16)fiduciaries take on a suite of legal responsibilities and are responsible for making decisions about, or managing, a 401(k) plan and its assets.

  • Reducing the day-to-day administrative work involved in managing a 401(k) plan. For example, rather than the employer having to work through issues like loan and distribution approval, a 3(16) fiduciary will do this for you. Some 3(16) fiduciaries will even handle signing and filing the annual Form 5500 required of many 401(k) plans.

From filing paperwork with government agencies to ongoing communications between employees and service providers, 401(k) plans need ongoing support to stay compliant with the law. For that reason, many employers, especially small and medium-sized businesses, find it helpful to hire a 3(16) Fiduciary Services Provider to serve as the plan administrator and to handle much of the administrative work. 

When you choose a Human Interest 401(k) plan, you can delegate some of your fiduciary responsibilities to us. As the plan’s administrator and 3(16) Fiduciary Services Provider, we handle the day-to-day operations and compliance-related tasks of your 401(k) and help mitigate the plan sponsor’s fiduciary liability.

Interested in learning more about hiring a 3(16) fiduciary? Talk to us today to find out the best fit for you and your company.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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