July 21

A Guide to 401(k) Fiduciary Responsibilities

401(k) plans are a powerful tool in helping employees prepare for their future. 

Participants can decide how much to contribute toward their retirement, enjoy tax-free growth on 401(k) funds, and for a Traditional 401(k), contributions and earnings won’t be taxed until withdrawal.

As an employer, you also receive several perks: 

  • well-designed 401(k) plan can help attract and retain talented employees at every level of the organization.
  • Employers may claim a tax deduction for contributions to employees’ accounts.
  • Unlike a pension, employers are not obliged to make contributions to employees’ 401(k) retirement accounts.
  • A 401(k) plan benefits employees at various levels of the organization, from owners and managers to rank-and-file employees.
  • Participants can roll over their 401(k) when they leave the company, easing administrative responsibilities.


Not sure which retirement plan is right for you?

We specialize in retirement plans and can help you review your 401(k), 403(b), and IRA options.


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Once you have established a 401(k) plan, you’ve assumed certain responsibilities in operating it:

  • Participation
  • Contributions
  • Vesting
  • Nondiscrimination
  • Investing 401(k) plan funds
  • Disclosing plan information to participants
  • Reporting to government agencies
  • Distributing plan benefits
  • Fiduciary responsibilities

You can choose to manage the plan yourself or to a financial firm, like Prosperity 401(k) Advisors, to take care of specific aspects of operating your 401(k) — though without some formal education, it’s difficult for Owners and Administrators to understand the full range of their responsibilities or how to satisfy those duties. Most Plan Sponsors prefer to offload the paperwork, administration, and Fiduciary liability onto 401(k) service providers.

In this article, we’ll focus on your Fiduciary responsibility to your plan participants. 



401(k) Fiduciary Responsibilities

What is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for retirement plans. ERISA was created to protect 401(k) plan participants, in part by assigning Fiduciary duties for those who manage and control plan assets.


What is a 401(k) Plan Fiduciary?

Under ERISA, Fiduciaries are those who act on behalf of the 401(k) plan. Fiduciaries must act prudently and in the best interest of the plan participants.

Fiduciary status is based on the functions performed in operating a 401(k) plan, including:

  • Making sure that the plan investments are well-managed and reasonably priced.
  • Using discretion in administering and managing the plan
  • Hiring a 401(k) Advisor to perform Fiduciary functions


Who is a 401(k) Plan Fiduciary?

A Fiduciary is anyone who is named in the Plan Document, as well as anyone who makes decisions about the management of the plan and its assets. Typical Fiduciaries are Employers, the Company’s Directors and Officers, and Plan Administrators and Trustees.


What are the Fiduciary responsibilities?

In general, Fiduciaries must act in the best interest of plan participants. This includes:

  • Acting solely in the interest of the participants and their beneficiaries;
  • Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
  • Carrying out duties with the care, skill, prudence, and diligence;
  • Following the Plan Document; and
  • Adequately diversifying plan investments.


1. Meeting investment responsibilities

After you decide what type of 401(k) plan works well for your company, it’s time to create the investment menu. As part of the 401(k) plan design process, you must decide:

  • Whether your employees will direct the investment of their accounts. You’ll also need to decide which investment options to offer to your participants. A 401(k) Advisor can help you determine the investment options to make available, or to manage the plan’s investment completely.
  • Whether you will manage the funds on their behalf.

A 401(k) Fiduciary is responsible for picking a fund lineup of prudent investments that gives your plan participants access to a diverse range of financial markets. A prudent investment is one that meets its investment objective for a reasonable fee.

You can hire either an ERISA 3(21) Advisor or an ERISA 3(38) Advisor to help manage your 401(k) investment menu.


What's the difference?

3(21) Investment Advisor vs. 3(38) Investment Manager

A 3(21) Investment Advisor "does it with you," acting as your co-Fiduciary. Your 3(21) Investment Advisor can recommend the investment lineup for your plan but doesn’t have discretion over plan investments. A 3(21) is for plan sponsors who are willing to accept Fiduciary liability.

A 3(38) Investment Manager "does it for you," and assumes the majority of investment responsibility and Fiduciary liability.


2. Meeting administrative responsibilities

There are numerous administration-related 401(k) Fiduciary responsibilities:

  • Keeping the governing Plan Document in compliance with applicable law.
  • Operating the plan in accordance with its Plan Document, including:
    • Letting employees participate based on the plan’s age and service eligibility requirements
    • Allocating contributions to participant accounts based on the compensation definition used by the plan
    • Paying out participant distributions, while forfeiting any non-vested portion of their account
    • Administering the participant loan program (if applicable)
    • Splitting participant accounts pursuant to a Qualified Domestic Relations Order (QDRO)
  • Meeting ERISA participant disclosure and government reporting requirements.
  • Completing any necessary plan testing and timely correcting any test failures.
  • Maintaining plan records in accordance with ERISA document retention rules.

A qualified 401(k) provider can help with most of these administrative tasks.


3. Ensuring reasonable fees.

Employers have a Fiduciary responsibility to ensure participants are paying reasonable 401(k) fees. However, ERISA does not define the standards for “reasonable” fees and government agencies only provide general guidance for evaluating 401(k) fees.

The Department of Labor (DOL) suggests “establishing an objective process to aid in your decision making." As an employer, you should understand:

  • The service provider fees and investment expenses you will pay, 
  • Whether they are competitive, and 
  • Whether they are reasonable in relation to the services to be provided and the investments you are considering. 


Additionally, you need to benchmark your 401(k) plan fees every 12 to 24 months against competing 401(k) providers or industry averages. Here's the simplest way to benchmark your fees:

  • Calculate the “all-in” fee for your plan
  • Compare this fee to the all-in fee of 3 or more competing 401(k) providers


Need help with your 401(k) benchmark?

401(k) fee benchmarking should be done at least every 1 to 2 years. We’ll help you calculate the “all-in” fee for your plan, then compare this fee to the all-in fee of 3+ other 401(k) providers.


Get in touch to start the conversation today!


4. Depositing employee contributions timely

For all contributions, the plan must designate a Fiduciary (usually the Trustee) to make sure that employee elective deferrals are deposited timely.

  • If you, the employer, automatically deduct elective deferrals from your employee’s wages, then you must deposit these contributions as soon as it’s reasonably possible to do so, but no later than the 15th business day of the month following the payday, if not sooner. 
  • If your plan has fewer than 100 participants, you must deposit contributions within 7 business days. 
  • If the employer doesn't make the deposits timely, the failure may constitute plan disqualification.


5. Maintaining adequate ERISA fidelity bond coverage

ERISA also requires the business to take out a fidelity bond equal to the lesser of $500,000 or a minimum of 10% of an employee benefit plan’s total assets. This bond serves to protect the plan’s assets from fiduciaries misusing or mishandling the funds in any way.


6. Selecting and monitoring 401(k) service providers

This is the most important 401(k) Fiduciary responsibility. However, 401(k) plans are technically complex and the services offered by 401(k) providers can vary dramatically in breadth, depth and price. 

Start by determining the professional help (plan administration, investment management, or both) that you need before you start shopping for providers. Consider value-added services, like a dedicated relationship manager, plan design consulting, and help with annual nondiscrimination testing.

To make this Fiduciary responsibility as easy to meet as possible, only hire 401(k) providers with transparent services and fee structures.


How to limit your Fiduciary liability

As a Fiduciary, you hold legal liability for carrying out your duties prudently, ensuring well-diversified plan investments, and paying only reasonable plan expenses.

Unfortunately, if you’re a growing business, one Fiduciary liability claim can cripple your business financially. And in 2020 alone, several high-profile 401(k) fee lawsuits have put the topic of 401(k) Fiduciary responsibilities in the national spotlight. These lawsuits have been focused mostly on employer liability for failing to meet their Fiduciary responsibilities. 

The good news is that it’s just not that difficult to avoid liability:

  • You can outsource your Fiduciary liability to Service Providers to handle the Fiduciary functions, which protects the business from claims of mismanagement. 
  • A 401(k) Advisor can accept full responsibility for the investment decisions for the plan. 
  • Your plan can be set up to give participants control of the investments in their accounts. Your 401(k) Advisor will offer employee education.

Even if you do hire 401(k) Service Providers to manage the whole plan, you retain some Fiduciary responsibility to select a competent Service Provider.


How to select a good 401(k) Advisor

  • Research the firm. What are their affiliations? Financial condition? Any recent litigation or enforcement action that has been taken against the firm? Does the firm have Fiduciary liability insurance?
  • Ask about their business practices. How will your 401(k) Advisor manage plan investments? How will participant investment decisions be handled? What is the firm’s performance record?
  • Maintain high standards. Don’t go for the lowest-cost provider; in the 401(k) industry, you get what you pay for. Look for competitive fees relative to experience and qualification.


Once you've hired a 401(k) Advisor, it’s your Fiduciary duty to monitor the quality of their service:

  • Evaluate any notices received about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed);
  • Review your 401(k) Advisor’s performance;
  • Read all reports they provide;
  • Check and understand actual fees charged;
  • Ask about policies and practices (such as trading, investment turnover, and proxy voting); and
  • Follow up on participant complaints.


We Can Help

As a Registered Investment Advisor, we are independent, fee-only Advisors with no conflicts of interest. We offer Fiduciary liability protection for Plan Sponsors and focus on a successful outcome for every single participant. Our client is your company and your employees.

To learn more about our 401(k) Advisory services, please fill out the form below. We look forward to speaking with you!

Contact Us

Prosperity 401(k) Advisors is proud to offer ERISA Fiduciary Advisory services.

For general inquiries regarding 401(k) plans or our plan services, use this form or call us at 925-314-8500.


Tags

3(21), 3(21) fiduciary, 3(38), 3(38) fiduciary, 401(k), 401k advisor, 401k fees, 401k investments, 401k plan, 403b, 403b plan, compliance testing, erisa, noncompliance


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