Top 3 Fiduciary Responsibilities Every 401(k) Plan Sponsor Should Know

Bottom Line Up Front

• An employer fiduciary is responsible for acting in the best interest of the 401(k) plan’s participants and beneficiaries, ensuring compliance with the Employee Retirement Income Security Act (ERISA) which sets the guidelines and regulations that employers must follow to fulfill their duties.
• The three key responsibilities of an employer fiduciary encompass carrying out administrative tasks, keeping 401(k) provider fees in check, and providing diversified quality investment opportunities.

If you’re a small business owner considering the implementation of a 401(k) plan for your business, it’s important to understand your responsibilities as a plan fiduciary, including compliance with the Employee Retirement Income Security Act (ERISA). As an employer fiduciary, your primary duty is to act in the best interest of the plan’s participants and beneficiaries, ensuring their well-being. This entails not only maximizing returns for the participants, but also adhering to ERISA compliance guidelines. While there are various fiduciary responsibilities, this article focuses on three key obligations that are essential for any small business owner venturing into the realm of 401(k) plans. 

Carry Out Administrative Tasks in a Timely Manner

There are numerous administrative tasks that are the responsibility of the employer fiduciary. One of the most crucial responsibilities is operating the 401(k) plan in accordance with the plan document. This includes ensuring deposits are made correctly and on time, as well as making sure any distributions are made in a timely fashion. Adhering to the plan document helps maintain consistency and ensure compliance with ERISA regulations.

Another important duty of the employer fiduciary is to keep track of employee eligibility and ensure that contributions are made once the employee becomes eligible to participate in the plan. It’s crucial to monitor eligibility criteria and notify employees of their eligibility (unless you have established automatic enrollment) to provide them with the opportunity to save for retirement.

The fiduciary must also make sure to maintain records in accordance with ERISA standards. Proper record-keeping is vital for demonstrating compliance with fiduciary responsibilities and providing transparency. It also helps come audit time.

Furthermore, you are also responsible for conducting any necessary plan testing, such as discrimination testing – this is normally outsourced to a firm like a Third Party Administrator (“TPA”). These tests are designed to ensure that the plan does not unfairly favor highly compensated employees over non-highly compensated employees. 

For detailed information on ERISA standards and regulations related to these administrative responsibilities, you can refer to the Department of Labor (DOL) website, which provides comprehensive guidance on ERISA compliance: Department of Labor – ERISA Compliance.

Keep 401(k) Fees in Check

Plan fees remain an important area of fiduciary oversight. Fiduciaries should regularly review both investment expenses and service provider fees to ensure they remain reasonable for the services provided. As a plan sponsor, you have the authority over plan assets meaning you decide which funds will be allowed or offered in the plan. You are expected to understand the fees that your 401(k) participants will incur based on their decisions. It’s important to weigh the benefits and the costs – your provider may offer many additional services and that may be desirable even at a higher cost. Fiduciaries can: 

• Determine the current costs being paid and to whom and request itemized documentation
• Compare fees charged by different providers

There are three different fees associated with a 401(k) plan which are administrative, investment, and consulting fees. By carefully monitoring and evaluating the fees, you can safeguard the long-term financial well-being of your plan participants.

Provide Diverse and Quality Investment Opportunities

ERISA doesn’t require fiduciaries to select the best-performing investments. Instead fiduciaries should establish a prudent process for selecting, monitoring, and replacing investments while offering participants a diversified lineup that meets the needs of the plan. Investment options should be reviewed regularly and evaluated against appropriate benchmarks and peers, not simply the highest-performing funds of the moment. 

To Wrap It Up

A fiduciary has many responsibilities in regards to a 401(k) plan. However at the root of all responsibilities is to act in the sole interest of the plan’s participants and beneficiaries. Employer fiduciaries must handle plan administration, try to limit fees, and offer diversified investment options in order to give provide participants with a well-managed retirement plan that’s operated in accordance with ERISA’s fiduciary standards. 

Although these responsibilities may seem daunting, there are experts in the field who will gladly help. Take the worry out of retirement plan administration and let Odyssey Advisors be your trusted partner in building and managing your company’s retirement plan. Our expert team will handle the complex responsibilities, so you can focus on what you do best. Say hello to peace of mind and contact us today!

Frequently Asked Questions About 401(k) Fiduciary Responsibilities

Who is considered a fiduciary of a 401(k) plan?

Under ERISA, a person may be considered a fiduciary based on the functions they perform for the plan, not simply their job title. This can include individuals who exercise discretionary authority over plan management or assets, provide investment advice for a fee, or have responsibility for plan administration. 

What are the main fiduciary duties under ERISA?

ERISA generally requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries, carry out their duties prudently, diversify plan investments, follow the plan’s governing documents, and ensure the plan pays only reasonable expenses. 

Can a 401(k) fiduciary be personally liable?

Yes. Fiduciaries who breach their responsibilities under ERISA may be personally liable for losses to the plan resulting from the breach. This makes having—and documenting—a prudent fiduciary process especially important. 

Does ERISA require fiduciaries to choose the best-performing investments? 

No. Fiduciary prudence isn’t determined simply by which investment ultimately produces the highest return. Fiduciaries should follow a prudent process when selecting and monitoring investments based on the information reasonably available at the time of the decision.