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What Is a 3(16) Fiduciary?


A fiduciary, in general, is a person or entity that manages property or assets for another party. A fiduciary for a retirement plan is responsible for the daily operation of a retirement plan, with duties outlined by ERISA. A 3(16) fiduciary, which is a very popular retirement plan fiduciary that employers outsource to, is a third party that handles all administrative duties of the retirement plan, from determining plan eligibility to processing plan changes. Some financial advisors have the experience and knowledge necessary to serve as a plan fiduciary. 

3(16) Fiduciary Explained

A 3(16) fiduciary is a service provider responsible for managing the day-to-day operations of retirement plans. Typically, these service providers are hired by small to medium-sized businesses (SMBs) looking for help managing their plans.

3(16) refers to a section of the Employee Retirement Income Security Act of 1974 (ERISA) which defines plan administrators. This is similar to the 401(k), which gets its name from the section of the U.S. tax code that established the plan.

In the context of finance, a fiduciary is a person or firm responsible for managing property or assets on the behalf of someone else. Fiduciary responsibility requires the asset manager to act in the client’s best interests, rather than in their own interest or the interest of their company.

Types of Retirement Plan Fiduciaries

There are three main types of retirement plan fiduciaries: 3(38), 3(16) and 3(21) fiduciaries. The 3(16) fiduciary established by ERISA is responsible for the day-to-day operations of retirement plans. ERISA also established 3(21) and 3(38) fiduciaries, responsible for overseeing the plan’s assets or investments.

There are many responsibilities that come with retirement plans, and not all 3(16) fiduciaries provide the same set of services. Thus, employers should understand exactly what the fiduciary provides, and they may need more than one type of fiduciary, depending on the level of assistance necessary.

3(16) Fiduciary Responsibilities

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To understand exactly what a 3(16) fiduciary does, we must take a closer look at their responsibilities. As mentioned earlier, these fiduciaries are responsible for the day-to-day operations of the retirement plan. Some of these responsibilities might include:

  • Signing and filing Form 5500 each year, as needed
  • Determining plan eligibility
  • Issuing disclosures and statements to employees
  • Updating personal information
  • Approving and processing distribution paperwork
  • Onboarding and offboarding employees
  • Processing plan changes

These are just a few examples of common responsibilities, but there may be many more. Form 5500 is one that informs the IRS and Department of Labor about the terms of the retirement plan. This step is necessary to ensure the plan complies with government regulations.

As you can see, there is a lot of work that must happen behind the scenes to manage a retirement plan. The result is that 3(16) fiduciaries become invaluable. They reduce the employer’s responsibility, both legally and in terms of the work of managing the plan.

Payroll Management

Another thing 3(16) fiduciaries must grapple with is payroll data. As one can imagine, payroll data can quickly become a data overload. Not only that, but errors can be common. And in many cases, those errors are nothing especially complicated. For example, the last name might be spelled incorrectly, or a birth date might be wrong.

These errors happen all the time, but they must be corrected before payroll can be processed correctly. Failing to do so would be costly for the plan. Thus, the 3(16) fiduciary is left to correct these errors.

TPA vs. 3(16) Fiduciary

Employers might hire bookkeepers and third-party administrators (TPAs) to help manage retirement plans. Given that section 3(16) of ERISA establishes the plan administrator, one might think TPAs and 3(16) fiduciaries are the same. However, while their responsibilities may overlap, they play distinct roles.

TPAs may perform many of the same duties as a 3(16) fiduciary, such as creating retirement plan documents, preparing employer and employee benefit statements and processing plan distributions.

The biggest difference is that when an employer hires a TPA to help manage a retirement plan, the employer remains in control of the plan while delegating some duties to the TPA. A 3(16) fiduciary, on the other hand, takes full control of the retirement plan. However, as noted earlier, some 3(16) fiduciaries only perform certain duties and will leave the rest for the employer to handle on their own or to outsource to another fiduciary.

The Bottom Line

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A 3(16) fiduciary manages the day-to-day operations of an employer-sponsored retirement plan. This includes everything from making changes to employee deferrals, changes to employee information, processing plan distributions and much more. While it is possible for employers to manage these details on their own, many SMBs find it makes more sense to outsource these responsibilities to a firm accustomed to dealing with them.

Tips for Retirement

  • A financial advisor can guide you through major financial decisions, like investing in your retirement plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Saving for retirement is important, but it is not always obvious just how much you should be saving. Use SmartAsset’s retirement calculator to estimate your retirement income needs.

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