Current Thinking

3(16) Administration—Make the Path Simple

We hear a lot of conversations among clients and advisors debating the value of a 3(16) Plan Administrator. A 3(16) Plan Administrator is the fiduciary who manages the day-to-day administration of a retirement plan, not only performing traditional Third Party Administrator (TPA) services, but accepting responsibility for ensuring that they are done right.

Included in those fiduciary duties is the compiling and filing with the U.S. Department of Labor (DOL) of Form 5500, which contains information about an employee benefit plan’s financial conditions, investments, and operations. In general, all retirement plans must file a Form 5500 for every year the plan holds assets.

Outsourcing these responsibilities to a 3(16) Plan Administrator can be a lifesaver for companies; a lack of knowledge/expertise can lead to a variety of penalties and inadvertent errors, ranging from hefty federal fines to the mismanagement of a retirement plan’s assets – all of which could negatively affect both the plan’s participants (employees) and the company itself.

This series — based on actual pitfalls that Pentegra staff have encountered when taking over administration of a plan from other parties, including the company’s own administrators and other TPAs – is designed to illustrate some of the problems our clients and prospective clients have experienced, and how Pentegra was able to solve them.

5500 Foibles
We’ve all been guilty of blindly signing/agreeing to terms of service in all areas of life – especially in today’s ever-faster-paced world, where reading all the fine print of a given document can seem needlessly time-consuming, whether it’s a car lease agreement or a subscription to a website. But when it comes to the aforementioned 5500, reading – and, just as importantly, understanding – it is of critical importance.

One nonprofit we worked with had engaged another, nationally known firm as its 3(16) TPA. The firm had experienced a fair amount of turnover – which can of course create problems in and of itself – but it had compounded the problem by not filing a 5500 for three years. This went undetected until the company hired a new director, who brought in his own human resources director.

As a result, we are now helping the nonprofit untangle the mess, but it requires going back over years of employment records to determine who should have been offered an opportunity to participate but wasn’t. To say this process has been “painful” for the firm is an understatement.

In another instance, one of our 3(16) clients recently reached out to ask how to handle a situation where a participant had contacted them inquiring about his account, but only had the first page of an old statement from their previous recordkeeper for the client to work with. The statement showed 100 percent of the participant’s account being forfeited back in 2015.

As this was an issue that occurred with the prior recordkeeper and before Pentegra was the 3(16) TPA, we instructed the client to contact the previous recordkeeper to research the issue, as well as the participant to acknowledge that the issue was being addressed. We also tried to reach out to that recordkeeper a number of times.

Time passed, and one of our administrators eventually received a phone call from the DOL – a name you do not usually want to see on your caller ID. The understandably frustrated participant had written a letter about the situation to his local district attorney, who forwarded the letter to the DOL.

“I wasn’t able to obtain a copy of the letter,” says the Pentegra administrator, “but I doubt the client ever pursued the issue with the prior recordkeeper or instructed the participant to reach out to the prior recordkeeper directly.” The DOL called the Pentegra administrator because his name was now on the 5500. We immediately gave our attention to resolving the issue ourselves — and to try and prevent a full-scale plan audit.

The DOL was able to put us in contact with the right people at the prior recordkeeper in order to research and resolve the issue. It turns out the participant was in fact forfeited in error, due to an issue with the way his account was initially set up by the client.

It took some time to resolve – there was a lot of back and forth getting us the permission we needed to access the information — but in the end Pentegra calculated the rate of return that the participant would have received had he not been forfeited in error. We finally were able to pull the total amount due to him from the plan’s forfeiture account to make him whole.

In another instance, according to one of our other administrators, “I decided to make it personal. I talked about signing the plan document and the 5500. I made the point that most people have never read their plan documents, and really don’t understand all the information on the 5500 — yet they sign them.

“I told them not to feel bad if they didn’t — most people don’t,” he continued. “Then I said, ‘I don’t know about you, but I always get a knot in my stomach when I’m signing something I haven’t read or don’t understand. Someone pushes a contract or a stack of papers in front of me and I know I should read it and understand it, but I don’t.’

“No time, not interested – whatever the reason,” the Pentegra administrator added. “I have an accountant and, at least on my taxes, he signs along with me, which gives me some comfort.”

On a 5500, it’s just your signature. You’re telling the DOL and IRS that all the information in the 5500 is accurate. Is it?

That’s a key advantage of hiring Pentegra as your 3(16) plan administrator. We’re named in your plan document, we sign the 5500. After all, it’s our work, so we should sign it. It’s peace of mind. You don’t have to worry about signing something you haven’t read or understand; if the DOL has an issue and picks up the phone to call someone, they are calling Pentegra.

About the Author

Richard Rausser

Richard W. Rausser has more than 30 years of experience in the retirement benefits industry. He is Senior Vice President of Thought Leadership at Pentegra, a leading provider of retirement plan and fiduciary outsourcing to organizations nationwide. Rich is responsible for helping to shape and define Pentegra’s viewpoint on workplace retirement plans, plan design strategy, retirement success and employee savings trends. His work is used by employers, employees, advisors, policymakers and the media to produce successful outcomes for American workers.  In addition, Rich is responsible for Pentegra’s Defined Benefit line of business, which includes a team of Actuaries and other retirement plan professionals as well as Pentegra’s BOLI line of business.  He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.