ERISA 3(16) Fiduciary Explained



ERISA, the Employment Retirement Security Act of 1974, established the standards governing employer sponsored retirement and health plans. For the protection of participants, ERISA considers sponsors fiduciaries and holds them to exceptionally high standards. Read on to better understand what it means to be a “3(16)” fiduciary.


The Buck Stops With Plan Sponsors

Under ERISA, a plan sponsor is inherently considered a 3(16) fiduciary: even when contracting out services to other 3(16) fiduciaries, plan sponsors retain responsibilities under the high standards of the law. As the Retirement Learning Center puts it:


Running a qualified retirement plan for employees is like running a business for clients. Just as with a business, the administrative responsibilities and liabilities of operating a plan are significant. The Department of Labor (DOL) views all business owners who sponsor retirement plans for employees as “3(16)” fiduciaries under federal law [ERISA Sec. 3(16)]. A 3(16) fiduciary is responsible for ensuring the plan is operated in compliance with the strict rules of ERISA day in and day out. One can say, the ERISA “buck stops here” on the 3(16)’s desk.


So what exactly does it mean that the “buck stops with plan sponsors?” According to the  U.S. Department of Labor: “ERISA protects retirement savings from mismanagement and abuse, and clarifies that those in charge of those savings be held to a high standard – that is, they must act in the best interests of plan participants. It also requires transparency and accountability, ensuring that participants have access to information about their plans.” ERISA carries so much weight that it is overseen–and enforced–by three entities:“ Labor Department’s Employee Benefits Security Administration, the Treasury Department’s Internal Revenue Service, and the Pension Benefit Guaranty Corporation.” To put the seriousness of being accountable as a 3(16) fiduciary in tangible terms for plan sponsors, the Retirement Learning Center offers:


Plan sponsors are held to the highest standard of care and must operate their plans in the best interest of participants….Their actions with respect to their plans will be judged against the “Prudent Person” rule, which says that all decisions and acts must be carried out “… with the care, skill, prudence, and diligence…” of a knowledgeable person. The DOL assumes plan sponsors know what they are doing when it comes to running a plan—and if they don’t—they should seek out competent support or be at risk of a fiduciary breach. From an ERISA standpoint, a plan’s “Jack of all trades,” must be master of all—not none….The DOL can hold plan sponsors personally liable for failing to fulfill their fiduciary obligations to their plan participants. Plan fiduciaries who fail in their duties can face costly civil and criminal penalties, too. Perhaps even jail time!


Indeed, because sponsoring company benefit plans comes with 3(16) fiduciary obligations, plan sponsors can be held personally liable for errors and this is a risk that can  never be fully eliminated. Fortunately, however, ERISA allows plan sponsors to outsource some of their 3(16) fiduciary responsibilities by formally appointing another entity to assume some of their plans’ administrative functions.” It is of course wise for plan sponsors to contract out for services, but in doing so, experts urge caution: “Many financial organizations tout the benefits of their 401(k) fiduciary services and, frankly, many of these messages can sound irresistibly compelling. But buyer beware; not all fiduciary services are created equal. In today’s increasingly litigious environment, it is imperative for plan sponsors to be educated consumers of ERISA fiduciary services.” Toward that end, a prudent process for outsourcing “3(16) responsibilities” must “avoid self-dealing, conflicts of interest or other improper influence,” and must involve assessing the qualifications of potential providers, as well as the quality of service and costs:


The process of selecting a 3(16) outsourced solution must be carried out in a prudent manner and solely in the interest of the plan participants. The DOL requires the plan sponsor to engage in an objective process designed to elicit information necessary to evaluate candidates considering, but not limited to, the following:


  • Qualifications of the service provider,
  • Whether it has a consistent track record of service,
  • Its professional “bench-strength” and tenure of staff,
  • The quality of services provided and
  • Reasonableness of the provider’s fees in light of the services provided.


In addition to managing the fiduciary risks associated with benefit plan sponsorship through careful outsourcing to other 3(16) fiduciaries,  plan sponsors can further reduce their risks with affordable fiduciary liability insurance, and Colonial Surety provides exceptional value. For a few dollars a day, plan sponsors can be covered in the event of claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial’s fiduciary liability insurance includes defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Conveniently, our Fiduciary With Cyber liability package is available with a one year commitment.


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Summing Up

Although the personal risks associated with serving as a plan sponsor can never be fully eliminated, they can be managed and reduced:

A plan sponsor can “outsource” some of its plan administration obligations under ERISA to an outside entity that is willing to assume the responsibilities of an ERISA 3(16) fiduciary of the plan.  It is not a decision to be made lightly as the DOL mandates the plan sponsor follow a prudent selection process….By engaging a 3(16)-plan administrator, the plan sponsor shifts fiduciary responsibility to the provider for the services specifically contracted (e.g., plan reporting, participant disclosures, distribution authorization, plan testing, etc.). It is important to note that a plan sponsor may never fully eliminate its fiduciary oversight responsibilities for the plan, and remains “on the hook” for the prudent selection and monitoring of the 3(16) plan administrator.


Don’t find yourself facing even the allegation of a fiduciary breach alone: a defense attorney with ERISA expertise costs about $600—per hour. Obtain protection from Colonial, where a whole year of Fiduciary Liability coverage is less than what you’d pay for one hour with that lawyer if a crisis hits. Plus, we even include Cyber Liability coverage to protect your business and retirement plan in the event of a cyber breach. Remember, cyber breaches can result in fiduciary breaches too. Obtain efficient and effective coverage for yourself in minutes today:


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Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.