Fiduciary Responsibility FAQ for 401k Plan Sponsors

In Asset Allocation, Corporate Sponsored 401k Plans, Retirement Planning by Chip Hymiller

The Employee Retirement Income Security Act of 1974 (ERISA) imposes strict standards of conduct on fiduciaries who have discretion over the administration and investment of 401(k) retirement plans and plan assets. ERISA and its fiduciary rules apply to defined contribution plans like 401(k) plans, ERISA 403(b) plans and also defined benefit plans.

Who are plan fiduciaries to 401(k) plans?
Basically, plan fiduciaries can be anyone who has the authority to make decisions and handle plan assets on behalf of plan participants. Examples include:

  • Business Owners
  • Key Management
  • Registered Investment Advisors (RIAs)
  • Third Party Administrators

What responsibilities do plan sponsors and other ERISA fiduciaries have to retirement plan participants?
ERISA Section 404 describes the specific responsibilities that fiduciaries have to plan participants. To paraphrase, those duties include:

  1. Acting solely in the interests of plan participants (and beneficiaries) and disclosing conflicts of interest.
  2. Carrying out duties with care, skill and diligence that a prudent person familiar with the matter at hand would use.
  3. Diversifying investments to reduce the risk of large investment losses.
  4. Following the terms of the 401(k) plan document.
  5. Paying only reasonable expenses from plan assets.

What are the penalties if a breach of fiduciary duty is discovered?
The Department of Labor (DOL) has enforcement powers under ERISA regarding breaches of fiduciary duty. The DOL may become aware of transgressions through information on form 5500, through a plan audit, or via a plan participant complaint.

Penalties resulting from the discovery of a breach in fiduciary duty can be very stiff. In fact, fiduciaries can be held personally liable for plan losses caused by a fiduciary breach. Standard corrective actions could include any of the following:

  • Restoring plan losses (including interest)
  • Returning ill-gotten gains such as excessive fees
  • Paying the expenses related to the correction of inappropriate actions

What can business owners, plan sponsors and other plan fiduciaries do to reduce their liability as it relates to their 401(k) or other qualified retirement plan?
Plan sponsors and other plan decision-makers should be aware of their fiduciary responsibility to plan participants. In addition, they should take a “best-practices” approach with all elements relating to the design and maintenance of the plan. This can include identifying competent and cost-effective service providers (third party administrators, investment advisors, record keepers, etc.). In addition, plan sponsors should effectively benchmark and monitor service providers over time, while documenting all elements of the plan decision-making process.

As a plan sponsor of a 401(k) plan how can Beacon Financial Strategies help me?
If you are a 401(k) plan fiduciary and have a plan with $1 million to $10 million in plan assets, Beacon can help you by:

  1. Reducing Plan Costs
  2. Improving Participation Rates
  3. Reducing Your Fiduciary Liability

As a Registered Investment Advisor (RIA) and fiduciary to 401(k) plans, Beacon Financial Strategies can help you in the following areas:

Plan Design: Beacon can help you make strategic 401(k) plan design decisions by helping you address the following questions:

1. When should employees become eligible to contribute?
2. How can highly compensated and other key employees contribute the maximum to the plan?
3. Should there be a vesting schedule and how would that work?
4. Should there be a profit sharing element to the plan?
5. What service providers offer the most cost-effective solutions?
6. What investment options should be offered that will allow plan participants of various ages and investment objectives to have adequate choices?

Plan Monitoring: Beacon, will serve as a 3(21), or 3(38) fiduciary to your plan and maintain a process of due-diligence and monitoring. Doing so, will satisfy “best practices” for your 401(k) plan and serve to reduce your personal liability as the plan sponsor.

Participant Education: It is important that your employees understand the retirement savings options available to them within the 401(k) plan that has been established for their benefit. Beacon provides group education sessions with the purpose of helping participants select the investment options that reflect their investment preferences, risk tolerance and savings objectives.

Plan Maintenance: Your business, the investment markets, tax laws and even your preferences change over time. It is important that your 401(k) retirement savings plan adapts to meet your changing needs. Beacon will help you keep your 401(k) plan current and make adjustments as they become necessary.

If you are a plan sponsor and would like to discuss the service alternatives available, or request a price/service comparison proposal for your company’s 401(k) plan, please feel free to contact our office today.