3(16) Administrative Fiduciaries
Section 3(16)(A) of ERISA has a circular definition of a plan “administrator.” In essence, it says that an administrator is the person or entity designated by the plan or the plan sponsor to be the plan administrator. Nonetheless, that section  has become the common reference to the fiduciary administrator for a retirement plan. The real definition is found in ERISA section 3(21)(A)(iii). It’s a person who “has any discretionary authority or discretionary responsibility in the administration of such plan.”  Typically, that’s the plan sponsor, but it may be assigned to others, for example, to the plan committee or to a third party who’s willing to take on some of the fiduciary responsibilities for administering the plan.

Unfortunately, that doesn’t tell us much about the responsibilities of an administrative fiduciary (sometimes called a capital A “Administrator” to distinguish from a third-party administrator, or TPA). When you look at the definitions of the other types of fiduciaries, you will see that they either control plan assets or deal with investments. As a result, a 3(16) fiduciary has all the other responsibilities, for example, for 401(k) plans: selecting and monitoring the recordkeeper, and other service providers; making decisions about eligibility to participate; approving loans, withdrawals and distributions. Indeed, there’s a very long list of responsibilities.

The plan sponsor needs to understand which duties are being delegated and which are being retained.

When providers, such as recordkeepers and TPAs, say that they’ll provide 3(16) services, they’re typically only providing a defined subset of the duties of administrative fiduciaries. They might determine eligibility, approve distributions, and so on, but they don’t usually have the authority to hire and fire the recordkeeper, the trustee or other service providers, or determine how those parties are paid. When a plan sponsor engages a 3(16) administrator, the plan sponsor needs to understand which duties are being delegated and which are being retained.

3(21) Fiduciary Investment Advisor 

This designation refers to ERISA section 3(21)(A)(ii). That section defines a fiduciary as: a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan.” No surprises there.

There’s regulation (§2510.3-21(c)) that adds details to the definition. Those details are what we commonly call the 5-part test. The key is that the investment advice is provided on a regular basis, which typically includes monitoring a plan’s investments. Since the regular basis test is typically satisfied by plan advisors, those advisors will be fiduciaries for their investment advice services.

The DOL takes the position that the investment advice definition applies to both plan level and participant-level investment advice.

3(38) Fiduciary Investment Manager

ERISA section 3(38) is actually part of a safe harbor definition. Section 3(38) generally says, in combination with other sections, that a plan sponsor isn’t responsible for the investment decisions of an investment manager if: the manager has the power to “manage, acquire or dispose” of plan assets; is a registered investment adviser, a bank or an insurance company; and “has acknowledged in writing that he’s a fiduciary with respect to the plan.” 

However, section 3(21) says that discretion over plan assets makes a person an investment fiduciary. In other words, if a financial professional has discretion over the management of investments in a plan, the financial professional will be an ERISA fiduciary for that purpose.

Again, the concept of a fiduciary discretionary investment manager—a 3(38) fiduciary—applies to both plan level and participant-level investment services.

Named Fiduciary

The definition of “Named Fiduciary” is straight forward. It’s a fiduciary named in the plan or who can be identified through a process described in the plan. ERISA requires that every plan document identify one or more fiduciaries who “shall have authority to control and manage the operation and administration of the plan.” That’s the named fiduciary.

As a practical matter the named fiduciary typically appoints an officer or a committee to serve as the primary investment fiduciary and as the administrative fiduciary. The officer or committee may then appoint a 3(21) investment advisor fiduciary or a 3(38) investment manager fiduciary for the investments, and may also appoint a 3(16) administrative fiduciary for at least some of the administrative duties.

The law generally requires that the named fiduciary prudently select and monitor the officer or committee members. At least one case has held that, if a plan says that the company will appoint other fiduciaries (e.g., a plan committee), but is silent on how the company will do that, the Named Fiduciary will be the company’s board of directors.

Responsible Plan Fiduciaries

The term “Responsible Plan Fiduciaries” was not commonly used until the Department of Labor’s 408(b)(2) regulation required that service providers make specific detailed disclosures to the plans they are serving. In that regulation, the DOL said that the 408(b)(2) disclosures had to be made to the “Responsible Plan Fiduciaries,” meaning the fiduciaries responsible for selecting and monitoring the service providers. As a practical matter, that’s an administrative responsibility (that is, a 3(16) duty) in most cases. However, the engagement of a 3(21) or 3(38) investment advisor would likely be considered an investment responsibility under section 3(21)(A)(i), which defines fiduciary status as including a person who exercises any authority or control over management of plan assets. It seems to me that the selection of an investment advisor or manager reasonably falls into that definition. For most plans, the Responsible Plan Fiduciary is the plan committee for both investment and administrative services.

The Responsible Plan Fiduciary has the responsibility to ensure that it received compliant disclosures and evaluated them.

Under the 408(b)(2) regulation, the Responsible Plan Fiduciary has the responsibility to ensure that it received compliant disclosures and evaluated them. For example, if the compensation (direct and indirect) of the service provider isn’t reasonable, the Responsible Plan Fiduciary would need to negotiate lower fees or decline to engage the service provider.

Co-Fiduciary Responsibility

Section 405(a) of ERISA defines co-fiduciary responsibility and liability. It doesn’t create another category of fiduciaries, but instead provides that a fiduciary can be liable for breaches of other fiduciaries under certain circumstances. The most common circumstance is if one fiduciary “has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.” If reasonable steps aren’t taken, the non-breaching fiduciary will be liable for any money that could’ve been preserved for the participants had reasonable steps been taken.

The requirements for “reasonable efforts” will vary under the circumstances, but in my experience, one type of effort is to report the breaching fiduciary to the Department of Labor’s Employee Benefit Security Administration.

Concluding Thoughts

In the retirement industry we use our own terminology as shorthand for different activities, including fiduciary responsibilities. But we also need to know the legal definitions and the associated responsibilities. And, when talking with plan sponsors, we need to carefully describe the parties who are fiduciaries and what the responsibilities of each. In that way, plan sponsors will be better positioned to fulfill their responsibilities.