Reducing Recordkeeper Risk with Fiduciary Partnerships
We’ve all heard horror stories about do-it-yourselfers who create more chaos and expense instead of saving money. You know: the would-be auto mechanic who forgets to tighten the drain plug when changing car oil. Or the amateur plumber who floods the basement with a faulty repair. Sometimes hiring an expert saves time, money, and worry. This same maxim applies to retirement plans. Although some plan sponsors—especially larger employers—may have some in-house expertise, most of them may benefit from hiring experts to administer at least certain aspects of their retirement plan.
Plan Sponsors Are Presumed to be Experts
The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to act in the best interests of plan participants and beneficiaries. They are also required to act as “prudent experts” as they fulfill their fiduciary duties. If they are not experts—and most are not—then they must obtain counsel from others who are. Plan sponsors, who are usually also acting as the plan administrator for their plan, cannot avoid fiduciary liability by protesting that “I did the best that I could based on what I knew.” Nope. It doesn’t work that way. Either the plan sponsor must obtain the requisite expertise or hire the appropriate outside experts to administer the plan.
Not All Service Providers Are Fiduciaries
A lot of service providers, such as recordkeepers and payroll firms, take great pains to insulate themselves from fiduciary liability. Recordkeepers will typically provide, as stated in their service agreement, “ministerial” services. Black’s Law Dictionary defines a “ministerial act” as “an act performed without the independent exercise of discretion or judgment.” This is critically important, for even as recordkeepers perform services that are necessary for the proper functioning of retirement plans, they do not want to take actions that will make them fiduciaries, with all the risk and responsibility that comes with it. So, while recordkeepers will perform ministerial duties such as tracking individual account balances, relaying trading information, and supplying reports (e.g., contributions, distributions, certain compliance test results), discretionary duties are properly left to those who are willing to accept fiduciary liability.
Recordkeepers Can Get Caught In a Bind
Recordkeepers often know quite a bit about plan design, compliance testing, loan servicing, asset portability, and about nearly all aspects of plan administration. The more they know about how plans work—and how they get tripped up—the better they can carve out their niche expertise and avoid moving “out of their lane.” Recordkeepers often know about plan operations even if they don’t provide service in that area. Consequently, they may be asked, usually “informally,” to offer opinions or even advice on a host of plan topics. After all, if a participant has a question and the plan sponsor doesn’t know the answer, the recordkeeper may be the next logical choice.
Careful recordkeepers probably get good at knowing how far they can go with a response without stepping over the line into exercising discretion or judgment. They may recite relevant rules or guidance without actually providing advice or endorsing an action. But how much better for them would it be to simply stick with what the plan sponsor has hired them to do, provide recordkeeping services—without venturing into vast, gray area that can lead to fiduciary liability?
There Is a Better Way
One of Pentegra’s core practice areas is providing administrative fiduciary services. For years, we have helped plan sponsors improve compliance and free up their time to run their businesses. Based on our conversations with our plan sponsor clients, we don’t need to convince them of the value we bring. They are more than happy to delegate their fiduciary duties to Pentegra. But what may not be so obvious is the benefit that we can also bring to recordkeepers and third-party administrators.
As an administrative plan fiduciary—also called an ERISA 3(16) fiduciary—Pentegra brings value to more than just the plan sponsor. By partnering with Pentegra, recordkeepers and also enjoy some of the same advantages that plan sponsors experience.
- Reduced risk and liability – Pentegra shoulders the responsibility for taking action on matters that recordkeepers may try to address—at their peril.
- Increased time to focus on core competencies – Having a named fiduciary to help plan sponsors also means that recordkeepers have more time to devote to their core functions.
- Better compliance – Because Pentegra knows every aspect of retirement plans—from plan design to creating effective policies to nondiscrimination testing—we help create better outcomes for all those whose services dovetail with ours.
- Higher value – Working with plan sponsors who work with Pentegra helps recordkeepers credibly bring additional value to more clients. Knowing how our 3(16) fiduciary services help plan sponsors can make it easier for recordkeepers to forge robust business relationships.
Partnering with Pentegra as your 3(16) administrative fiduciary helps strengthen your business from every angle—reducing risk, improving operational efficiency, and creating new opportunities for growth. Contact us at solutions@pentegra.com to learn more.