The “3(16) services” market is growing in sophistication, and is demonstrating that it is just not a passing fancy, a manufacturing of a need for a non-existent purpose. Service providers are demonstrating their ability to customize their fiduciary services to their customers’ needs and-just as important-to their own capacity to provide selected services where they feel they can add value. Selective design of these “allocated fiduciary” service arrangements are really their hallmark.
“Allocated fiduciary” arrangements is a much better term for these service packages than “3(16),” as they provide not only “Plan Administrator” services as defined by the Code and ERISA, but also “run of the mill” fiduciary services which are generally covered under ERISA Section 3(21). For example, making a determination of who is the proper beneficiary under a plan is technically a service covered under 3(21), while making a QDRO determination is technically a service covered by 3(16). The more sophisticated programs also appoint to the service provider some measure of “settlor” function for a number of necessary plan actions which are not fiduciary in nature.
These allocated fiduciary services are also at the heart of what makes a MEP work-it is virtually beyond the capacity of the typical association which offers a closed MEP to its members to properly operate in today’s demanding regulatory environment without the use of a fiduciary service provider. They are also what makes an “aggregation” arrangement (the only alternative available to Open MEPs ®) work.
Which then brings me to my point: the complex nature of handling 403(b) plans-and, in particular, the unique manner in which the fiduciary rules apply to them-make these plans uniquely suited to customized fiduciary services. It is well beyond the skill set of many 501(c)(3) organizations to make sense of their often complicated 403(b) programs, and to put them into some kind of sensical order. This must be done all the while applying a number of rules intended for the 401(k) market (with their centralized recordkeeping systems) in a plan which may have significant assets held by multiple vendors under a variety of contracts with differing terms. These sponsors at one time could rely upon the insurance carrier or their custodian to bear the burden of compliance, but the 2007 403(b) regulations have virtually eliminated that service.
Allocated fiduciary services are especially critical in the growing movement toward 403(b) MEPs, both of the ERISA and non-ERISA types. It takes a special expertise to manage the “legacy” contract issues in a coordinated and meaningful way between a significant number of employers between which employees can often transfers. Transferring employees are surely a problem for 401(k) plans. But they are especially exacerbated by other challenges in 403(b) arrangements, with their unique service and aggregation rules; excludable contracts rules; needs for special arrangements for transfers between different vendors from a wide number of employers; and in collecting and harmonizing data from a potentially large number of disparate investment platforms. For ERISA 403(b) plans, the Form 5500s can be a nightmare for those not well versed in collecting and managing the unique data related to those plans.The 403(b) MEP lead sponsor should be cautious when considering stepping into that lead role without having allocated significant responsibility to a well qualified fiduciary service provider, as the liabilities related to failure can be significant.