Understanding 401(k) Plan Fiduciary Roles

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

The Employee Retirement Income Security Act of 1974 (ERISA) established a number of safeguards to ensure proper handling of 401(k) and other retirement plan assets.  Business owners, key management and other 401(k) plan “decision makers” can be held personally liable in the event of a breach of their fiduciary responsibility to plan participants.

It is important that business owners and 401(k) plan sponsors understand the role of 401(k) service providers – especially in the context of defraying some of their fiduciary responsibility to others.  This article discusses the role of various fiduciaries to 401(k) plans, as well as service providers who may not be considered plan fiduciaries.

Who Are the Plan’s ERISA Fiduciaries?

In general, fiduciaries are those individuals who have discretionary control over the management of the plan or plan assets.  Fiduciary status can arise from an appointment or assignment of responsibilities, or it can be based on the functions a person performs for the plan.  If an individual exercises discretion in administering the plan or has control over plan assets, that person will be an ERISA fiduciary to the extent of that discretion or control.  Here are the main categories of ERISA fiduciaries.

Named Fiduciary (Plan Sponsor):  Each ERISA plan must have at least one named fiduciary.  Generally, the named fiduciary is the employer sponsoring the plan (plan sponsor), or key executives in the business (President, CEO, CFO, etc).

Named fiduciaries have the overall responsibility for their plans and fiduciary functions, but they may hire or appoint other individuals to be fiduciaries for specific purposes, such as the investment of plan assets.

Named fiduciaries can hire non-fiduciary service providers such as recordkeepers, third-party administrators and non-fiduciary investment advisors to provide services to the plan.  Although named fiduciaries can delegate or share fiduciary responsibility, they can never fully absolve themselves of their fiduciary responsibilities.

ERISA Section 3(16) Plan Administrator:  An ERISA Section 3(16) fiduciary is normally appointed by the named fiduciary.  The 3(16) fiduciary generally assumes the following responsibilities:

  • Interpreting the plan document
  • Determining eligibility of plan participants
  • Establishing plan policies, such as loan or hardship withdrawal procedures
  • Ensuring the Summary Plan Description and other required notices or disclosures are properly drafted and delivered to participants and beneficiaries
  • Filing Form 5500

It is important to distinguish the 3(16) Plan Administrator from the third-party administrator (TPA) and recordkeeper.  The TPA and recordkeeper do not generally have discretion over the administration of the plan and only act based on instructions from the named fiduciary.  While some TPAs offer ERISA 3(16) fiduciary services, not all assume this role.

Fiduciary Investment Advisor Roles:  Because most named fiduciaries and plan sponsors do not have the knowledge, interest or ability to effectively select and monitor the investments available to plan participants, an outside investment advisor is retained to fulfill this role.

Not all investment advisors assume a fiduciary responsibility in advising 401(k) plans.  This point is important because only investment advisors who assume a fiduciary responsibility can serve the purpose of defraying some of the liability away from the named fiduciary, or plan sponsor.

There are two types of fiduciary investment advisory arrangements as follows:

  • ERISA Section 3(21) Investment Advisor: Investment advisors serving 401(k) plans in a 3(21) fiduciary capacity agree to be subject to the fiduciary standards with respect to their investment recommendations and submits to the Department of Labor’s enforcement jurisdiction.

An ERISA 3(21) investment advisor typically serves as a “non-discretionary” fiduciary.  Investment advisors serving in this capacity generally make investment recommendations to the plan sponsor regarding which investments should be available (or eliminated) in the 401(k) plan to participants.  Using the advisor’s recommendations, the plan sponsor would normally make the final decision regarding plan investments.

Under a 3(21) fiduciary arrangement, plan sponsors and the investment advisor partner together to make investment decisions to benefit plan participants and share in the legal responsibility for the selection and performance of the investments.

  • ERISA Section 3(38) Investment Manager: The plan sponsor can choose to hire an ERISA 3(38) investment manager.  A 3(38) investment manager would assume full “discretionary” control of the plan investments.  Appointing an investment manager relieves the plan sponsor of fiduciary liability regarding plan investments.

Under ERISA 3(38), only a bank, an insurance company, or a Registered Investment Advisor (RIA) may be appointed to serve in this capacity.  3(38) investment managers can unilaterally make investment decisions impacting plan participants without consulting with the plan sponsor.

How Can Fiduciaries Help 401(k) Plan Sponsors?

When it comes to establishing and maintaining a 401(k) plan, there are many moving parts.  Very few business owners and plan sponsors have the time and inclination to ensure every element of their retirement plan is functioning properly.  The cost of making a mistake in this area can be enormous and that is a risk few businesses care to take – especially when plan decision-makers can be held personally liable.  Hiring the right fiduciaries can save you time, money and the cost of correcting a mistake.

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 and service comparison proposal for your company’s 401(k) plan, please feel free to contact our office today.