In recent months TPAs have asked me with increasing frequency about expanding their service offerings to include 3(16) plan administrator services. They are feeling pressure from their clients to provide these services but understandably are reluctant to jump into a new business model that is new, untested, and to some extent uncertain.
These are the questions TPAs need to answer before taking the leap.
- How much are you willing and able to do as plan administrator? Service arrangements range from filing the annual return as plan administrator to accepting responsibility for interpreting the plan and other service providers.
- Can you price this service so that it is profitable for you and the cost reasonable to your clients? You will be assuming greater responsibilities and liabilities. Your pricing should reflect the additional risk and consider the cost of E&O coverage and bonding.
- Are you willing to accept co-fiduciary responsibilities and liabilities? As a 3(16) you will be an ERISA fiduciary required to act when you become aware of the bad behavior of other plan fiduciaries. Those other fiduciaries may plan sponsors and their officers and employees. Will you be able to stand up to them in the face of the possibility of losing their business? Do you want this potential conflict?
- Are you creating any conflicts of interest that violate ERISA or result in prohibited transactions? As a fiduciary, for example, you cannot use your authority as a fiduciary to increase your own fees or receive compensation from other service providers to the plan.
- Are you willing to put in the work and incur the costs associated with establishing legal documentation and written processes? Your service agreements must carefully describe what you are responsible for and your client's responsibilities. There should be no ambiguity about who does what. Imprecise agreements are a litigator's dream. You should also consider developing written procedures for your services that establish a “control” environment.