LAST REVIEWED Jun 08 2020 7 MIN READ
By The Human Interest Team
Part of having a benefits plan is administrating it. This often includes heavy day-to-day obligations, compliance testing, oversight, and more. 401(k) administrators can help businesses manage that responsibility.
What Is a Plan Administrator?
Ultimately, plan administrators help ensure that 401(k) plans and other employer-sponsored benefit plans follow the government’s rules. Potential tasks can include:
Selecting a plan and structuring the plan offerings, including the types of retirement account options
Making administrative decisions
Offering advice to help keep the plan competitive and compliant, which makes it more likely the plan will pass any required nondiscrimination testing
Offering advice on profit-sharing programs
Offering advice on employee-sharing programs
Signing IRS Form 5500
Not all plan administrators will handle all of these tasks; for example, only plan administrators that meet 3(16) fiduciary status sign Form 5500. However, all fiduciaries are bound to complete their tasks and services based on the well-being of the plan participants, not in the interests of the company itself. That’s why many plan sponsors turn to third-party services and contractors: to remove any potential conflict of interest.
Operating a 401(k) is a challenging task with a lot of moving parts. While employees who have a 401(k) under an employer’s plan have a lot to do and think about with choosing investments and making strategic contributions, there’s even more going on in the background. Employers, or plan sponsors, have to do a lot of work to keep the plan compliant with ERISA requirements, handle administrative tasks, and more.
Employers have the option of turning to 401(k) plan administrators, which are services that can handle all of those compliance and administrative obligations for them. These third-party administrators act as fiduciaries. Fiduciaries are individuals, organizations, or entities that handle financial assets and make financial decisions in the best interests of the asset owners. 401(k) plan administrators can be different types of fiduciaries, but the most common type is an ERISA 3(16) fiduciary — an administrative fiduciary.
ERISA 3(16) Fiduciary
ERISA 3(16) fiduciaries handle the daily administrative obligations that plan sponsors are responsible for. These tasks include handling employee notices, processing 401(k) loans, and other obligations. Another type of fiduciary — a 3(38) fiduciary — handles even more tasks. 3(38) fiduciaries are also called investment managers; they choose investment options on the plan sponsor’s behalf, and they are ethically obligated to act in the participants’ best interests.
Different 401(k) have different combinations of plan administrators. Some plans may have no fiduciaries at all, just plan administrators who handle daily compliance and administrative tasks but without accepting liability. Some sponsors have only 3(16) fiduciaries, while others have a separate 3(16) fiduciary and 3(38) fiduciary. Still others may hire a plan administrator service that acts as both types.
Outsourcing the Job
Small companies often try to manage administration obligations internally. But as companies continue to grow, or if they offer complex benefit plans, they may need to seek outside assistance. Hiring a professional or third-party services streamlines the process and removes the administrative burden from the company. If you choose 3(16) or 3(38) fiduciaries, making the switch can also relieve the liability burden. Professional services are more familiar with the applicable laws on regional, state, and federal scales, which reduces the risk of being noncompliant.
Depending on the structure of the plan, either participants or the employer may directly pay the fees charged by a third-party plan administrator. Generally, the fees follow this format:
Flat monthly or annual fees
Per-eligible employee or per-participant fees
Fees for additional services like 401(k) loan administration, education, and more stringent fiduciary obligations
However, some services may charge based on other fee models. They can base their fees on AUM, or Assets Under Management, for example, to earn an additional percentage of the plan’s assets.
Delegating the Investing Decisions
Plan sponsors or plan administrators often rely on an investment company to manage the fund investments. These companies can be insurance or trust companies, pension specialists, or even administrator employees, but they are obligated to make ethical decisions to the same degree as the administrator. The individual specialists often have financial roles, such as being an actuary, a broker, or an investment manager.
Risks of Being a 3(16) Plan Administrator
Being a 3(16) plan administrator carries a lot of responsibility and liability. When the Department of Labor, IRS, or Employee Benefits Security Administration (EBSA) start an audit on a plan, the 3(16) plan administrator must manage the process. Because the audit was likely triggered by an oversight or mistake on their part, the audit will also scrutinize their performance. Fixing uncovered errors and problems can be costly and time-intensive for plan administrators.
Should You Be Acting as a 3(16) Plan Administrator?
While anyone can be a 3(16) plan administrator, it’s vitally important to choose an individual or an entity that’s up to the task. 3(16) plan administrators need to have the time, experience, and expertise to manage the administrative tasks and keep the plan compliant with ERISA and other obligations.
Human Interest offers 3(21) and 3(38) fiduciary services. Our in-house TPA takes on the same role as a 3(16) plan administrator and manages the day-to-day operations of the plan. Contact us today to learn more.
The Human Interest Team
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 advising, and integration with leading payroll providers.