What Is a Fiduciary?
Fiduciaries are individuals or entities with a legal obligation to act solely in the best interests of their beneficiaries. They must exercise due diligence and act in good faith, loyalty, and integrity when managing the assets of another person or organization.
Fiduciaries must avoid conflicts of interest and ensure that all actions and decisions they take follow the goals established by the client.
In 401(k) plans, a fiduciary is especially important because this person has legal responsibility for the retirement plan's compliance with federal regulations such as the Employee Retirement Income Security Act of 1974 (ERISA).
This job includes working with service providers to follow the plan documents, implementing diverse investment strategies, monitoring performance, managing plan expenses, exercising prudence, and providing participants with accurate information.
401(k) Plan Fiduciary Responsibilities
To ensure that the best interests of participants are upheld, 401(k) plan administrators must:
Avoid Conflict of Interest
An important fiduciary responsibility is to avoid any conflict of interest between the plan, other employers, and participants. It means that no individual connected to the plan should benefit financially from a decision made concerning the plan.
Examples of prohibited acts include:
- Diverting plan assets for the benefit of a sponsor
- Self-dealing
- Acquiring employer investment or real property on behalf of the plan
- Lending plan money to an employer or plan administrator
Exercise Prudence
It means 401(k) plan administrators should carefully evaluate all available options and choose investments expected to benefit plan participants. As fiduciaries, they are expected to ask questions, explore alternatives, and seek expert advice when necessary.
Decisions should be made only after thorough consideration. Processes must be diligently documented to show that investment and other plan decisions are based on research and sound analysis.
Implement Diversified Investment Strategies
401(k) plan administrators must ensure that investments are diversified. It reduces potential large investment losses from any single asset class or security, resulting in a more balanced portfolio with less volatility.
Administrators are prohibited from investing solely in a particular asset or industry. They must consider investments based on types, geographic location, maturity periods, and industry type.
This rule applies unless the 401(k) participants explicitly give orders to invest in specific asset types or industries.
Follow the Plan Documents
Fiduciaries must ensure that the 401(k) plan is administered as stated in its documents. It includes making timely contributions, informing participants of their rights and obligations, correctly calculating benefits, and following Internal Revenue Service (IRS) regulations.
Failure to adhere to these standards may result in financial penalties or plan disqualification. Employers should periodically review plan documents to ensure they are up-to-date with any applicable laws or regulations.
Efficiently Manage Plan Expenses
The goal is to minimize costs while maximizing value and services. Administrators must determine whether fees paid by the plan are reasonable in relation to the investments chosen or the third-party services provided.
Additionally, plan administrators should monitor external service providers such as investment advisors and recordkeepers regularly. It helps ensure that providers are delivering high-quality service at a competitive rate.
4 Essential Players for 401(k) Plan Administration
The following are crucial for the efficient management and administration of 401(k) plans:
Plan Sponsor
The plan sponsor is responsible for ensuring that its plan complies with qualified plan regulations.
Who Is Assigned?
The plan sponsor is the company or business entity whose employees are eligible to participate in the 401(k) plan.
In the case of multiple entities with shared ownership combining their workforce under a single plan, also known as a controlled group, one of the entities is designated as the plan sponsor.
A plan sponsor may also be an association, group, or professional employer organization (PEO) in a multiple employer plan (MEP). An MEP comprises non-related private businesses merging their employees under one 401(k) plan.
Duties and Responsibilities
Whatever the case, the plan sponsor is responsible for initiating, establishing, and maintaining the sustainable 401(k) plan. They must ensure that all necessary documents are completed and submitted to establish a valid plan.
Sponsors are also responsible for making ongoing contributions to the plan and communicating with employees about the retirement plan offerings. Sponsors are not necessarily fiduciaries since they make decisions based on their business interests.
Plan Administrator
ERISA requires all retirement plans to have designated plan administrators.
Who Is Assigned?
By default, it assigns sponsors as plan administrators unless another entity is specified. Plan administrators have specialized tasks and require comprehensive recordkeeping tools, so in some cases, a third party is typically assigned instead of the plan sponsor.
Duties and Responsibilities
Plan administrators are responsible for the day-to-day operations of the plan. It includes informing participants of their rights and options, paying benefits, preparing required documents and forms, and complying with government rules and regulations.
They also respond to requests for information from employees or government agencies, file any required returns or reports, and track eligibility for plan participation and vesting schedules.
When performing day-to-day ministerial functions, plan administrators are not fiduciaries. However, they must act in the best interest of plan participants on decisions involving administration and control of plan assets.
Named Fiduciary
ERISA also requires all retirement plans to have a named fiduciary, who has the most liability and carries out the ultimate responsibility for ensuring plan compliance with ERISA regulations.
Who Is Assigned?
The named fiduciary is usually either an executive officer within the organization or a third-party financial advisor or consultant. They can also be appointed by other executives to spread liability among multiple parties.
Duties and Responsibilities
The duties of the named fiduciary include monitoring plan investments, conducting periodic reviews of service providers and investment options, and selecting an investment advisor to assist in making decisions about assets and other securities.
Plan participants and beneficiaries can also go to the named fiduciary for questions on who is responsible for specific aspects of a 401(k) plan.
Trustee
A 401(k) or any other retirement plan must have its assets held in trust. The employer, a third-party institution, or both can establish the trust.
Who Is Assigned?
The named fiduciary typically assigns a trustee to manage the plan’s assets and oversee investments. It can be an employee of the sponsoring institution or an external corporate trustee. Trustees are usually experts when it comes to institutional investments.
Duties and Responsibilities
The trustee is responsible for holding and managing plan assets according to fiduciary duty standards imposed by ERISA. They must also invest the funds in accordance with prudent investment standards and protect participants from mismanagement of their savings.
The trustee has a fiduciary responsibility to act in the best interest of plan participants and beneficiaries. Still, they are not liable for any losses incurred by the trust unless their management was negligent or involved fraud.
The trustee is the only party whose responsibilities involve solely protecting the interests of employees and beneficiaries, making it a fiduciary role under ERISA.
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Hiring a Service Provider
Plan sponsors may assign a third-party service provider to administer a 401(k) plan. It is important to hire a qualified provider that can supply the necessary services and competently fulfill fiduciary duties.
The service provider works in conjunction with the named fiduciary to ensure compliance with ERISA regulations. When making management decisions or offering advice, they must act in the best interest of the plan participants.
By hiring a qualified service provider, the employer transfers some of their fiduciary responsibility to an expert who can help them properly manage their 401(k) plan. Consider the following before hiring a third-party service provider:
Understanding the Provider's Background and Affiliations
When selecting a service provider for your 401(k) plan, it is important to confirm the company's background and affiliations. It is also beneficial to look into their client references, industry knowledge, and licensing information.
You should consider the potential provider's financial situation and the specific assets that they manage. You should also confirm their experience in handling 401(k) plans.
Reviewing the Provider's Investment Strategy and Fees
You should review how the provider plans to use the assets of your 401(k) plan. This includes their investment strategy and fees that you are expected to pay.
The fees you pay should be clearly stated in a contract, and there should be no surprises when it comes time to make a payment.
The provider's investment strategy should align with your goals and comply with all applicable laws and regulations. You should also consider whether or not the provider offers any support resources or tools that may help you better manage the 401(k) plan.
Assessing the Qualifications of the Provider's Professionals
You should confirm that all professionals associated with the third-party service provider are properly registered and qualified to provide services related to 401(k) plans. Check if they have been involved in disciplinary or legal actions in the past.
You must also know potential conflicts of interest between the provider and its employees. It includes considerations such as whether or not they receive additional compensation from other sources that could influence decisions made regarding your 401(k) plan.
The Bottom Line
A fiduciary acts in the best interest of their clients. In the case of a 401(k) plan, fiduciaries have a responsibility to avoid conflict of interest, exercise prudence, diversify investments, comply with plan documents, and efficiently manage expenses.
A 401(k) plan involves four key entities: the sponsor, administrator, named fiduciary, and trustee. Each has its own responsibilities and must operate according to ERISA regulations.
Sponsors or employers may opt to hire a third-party service provider who can competently fulfill fiduciary duties when managing a business's 401(k) plan.
Ensure you understand the provider's background, affiliations, financial situation, investment strategy, fees, and employee qualifications before entering into a contract. It guarantees that all participants and beneficiaries of the 401(k) receive the best service.
401k Plan Administrator Fiduciary Responsibility FAQs
What is fiduciary?
A fiduciary is a person or organization with the legal obligation to act in the best interests of another party. This means they must act with loyalty, prudence, and good faith when making decisions about someone else’s money or property. A fiduciary relationship is where trust is placed upon a person accountable for making decisions that benefit another person or entity.
Why is a fiduciary important?
A fiduciary is important since it ensures that the 401k plan participants’ interests are protected in all decisions regarding assets and investments. It ensures compliance with rules and regulations.
What are fiduciary responsibilities?
Fiduciary responsibilities relating to a 401k plan revolve around avoiding conflicts of interest, exercising prudence, implementing diverse investment strategies, following plan documents, and managing expenses efficiently.
Who is the fiduciary of a 401k plan?
The named fiduciary acts in the best interest of participants in a 401k plan. Depending on the plan documents, it may be the plan sponsor, administrator, trustee, or a third-party service provider.
How do you know if someone is a fiduciary?
Check their qualifications and professional credentials. You may also look at their affiliations and research recent disciplinary or legal actions taken against them.
