401k Fiduciary: Critical Responsibilities and Duties

401k fiduciary …what the heck does that even mean?

If you’re responsible for any aspect of the 401k and you don’t know, we don’t blame you. The Department of Labor isn’t exactly known for simple explanations and easy-to-understand rules.

But as someone responsible for 401k compliance and administration at your company—whether you’re signing Form 5500 each year or just handling part of the process—there are some very big legal responsibilities you need to be aware of.

In this guide, we’re going to walk you through everything you need to know about being a 401k fiduciary—what it means, what your legal responsibilities are, and steps you can take can to offload some of that liability and make your plan’s compliance as simple and easy as possible.

So, without further ado, let’s dive right in.

Are You a 401k Fiduciary?

Most likely, you’re a fiduciary if you…

• Sign the Form 5500 or other regulatory filings
• Sign Plan Documents, (like the Adoption Agreement) created by your TPA or recordkeeper
• Choose the Plan’s Providers– or sit on the committee that hires Plan Providers
• Exercise authority over the plan – be it on the investment or administrative side
• Make decisions that affect plan assets, how they are invested, or how they may be spent to cover the cost of operating the plan (like the cost of administrative, investment advisory, or audit services)
• Are identified as a fiduciary in plan documents (now there is no doubt – you ARE a fiduciary).

If you don’t meet any of the above criteria, even if you’re involved in the day-to-day operation or administration of the plan, it’s likely that you are not a fiduciary.

Okay, so now you have an idea whether or not you’re a fiduciary. But what does that actually mean?

What It Means to be a 401k Fiduciary

Fiduciaries are the parties or individual(s) that are legally responsible for a 401k plan — be it on the financial or administrative side—to ensure that participants’ hard-earned retirement savings are well-protected and in good care.

As you can imagine, fiduciaries are pretty important.

As a fiduciary, you’re legally responsible for specific aspects of the plan, or maybe even the whole plan itself. That means mistakes, errors, or wrongdoing in the management of your plan may ultimately be your responsibility. If the company doesn’t have the money to fix any errors, your personal assets may be on the hook.

The liability involved with being a fiduciary is serious, without doubt. But we don’t want to scare you. The chances of a DoL audit aren’t super high (unless your participants complain to the DoL). There are also plenty of things that can be done to protect the plan sponsor, offload some of the liability, and make sure you’re meeting all those fiduciary responsibilities.

Basically, your 401k fiduciary responsibilities may be monumental – but they don’t need to be overwhelming. Let’s break them down:

401k Fiduciary Responsibilities

The legal responsibilities of the fiduciary are laid out in 1972’s legendary Employee Retirement Income Security Act (a.k.a. ERISA)! And yeah, that’s about as exciting as talking about ERISA gets.

But don’t worry, there’s plenty of excitement ahead ( …if you love legal responsibilities and financial burdens).

401k Fiduciary Plan Investment Responsibilities

Meeting investment responsibilities sounds pretty intimidating, but they’re actually reasonably easy to fulfill. Here are the main duties:

Pick Prudent Investments

As the person managing investment, you have the responsibility to pick investments that meet their objectives for a reasonable fee.

This rule is often called the “prudent person” rule – a nice, common sense rule that states if you’re in charge of someone’s assets, you have to manage them like a reasonable person with an eye to growing those assets.

These days, that’s easier than ever. Many index funds offer comparable returns and low fees and can be an excellent option.

Meet Diversification Requirements

In essence, this requires you to offer a range of investment options – ensuring that employees can distribute their plan assets appropriately.

Model the Federal Thrift Savings Plan

A simple way for employers to meet their investment-related fiduciary responsibilities is modeling their 401k fund lineup after the Federal government’s Thrift Savings Plan (TSP) – whose prudent investments would meet ERISA 404(c) diversification requirements. While the funds used by the TSP are not available to the general public, it’s possible for any employer to model their fund lineup after the TSP using commercially-available index funds.

But the responsibilities of being a 401k fiduciary don’t stop at just investment options. There’s still work to be done.

Review and Monitor the Investments

Once you have chosen the Investments, you must review and monitor these investments to assess their performance and cost relative to other investments with similar objectives.

401k Fiduciary Plan Administration Duties

Keeping Compliant with Plan Design and IRS Rules

As the fiduciary, you’re also responsible for handling or overseeing administration duties – according to the rules laid out in the plan document. These rules include essential information about:

1. The Definition of Eligible Compensation

The type of compensation that’s eligible for 401k deferrals (IE salary, wages, commissions, bonuses, etc).

2. Eligibility Requirements for Enrollment & Employer Contributions

You naturally have to adhere to any age and service requirements that have been put in place. These are, at maximum: 21 years of age and/or 1 year of service (1000 hours worked).

3. Deposits, loans, distributions, and QDROs

These are some of the most common 401k financial transactions you’ll deal with, and it’s up to you to ensure that they’re in compliance with your plan document and IRS regulations.

All this also means ensuring that the plan document is up-to-date and in accordance with the latest Internal Revenue Code updates, which are announced regularly.

Managing the 401k-deposit process

Deposits are the lifeblood of the 401k. They’re how your employees’ money gets from your payroll system into the plan. And it’s your responsibility to make sure that happens smoothly. That means:

• Depositing contributions in a timely manner.
• Ensuring deferral rates are properly updated in payroll each time an employee changes them in the 401k provider’s online interface.
• Setting up loan repayments according to the repayment schedule provided by the 401k provider.

Ensuring that the required participant statements and notices are sent

Throughout the lifetime of your 401k, you’ll be required to send participants certain notices at different times. Some must be sent every year, or every quarter. Others are required each time a certain event takes place, such as when a newly hired employee approaches eligibility.

Keeping good records per the ERISA record retention requirements

Record retention is a huge part of dealing with a 401k. Whether during a DoL audit, or your scheduled annual 401k audit, an auditor always asks for documents and records, so being diligent and organized is crucial.

Performing annual compliance responsibilities

Perhaps one of the most important duties of a fiduciary is to oversee the annual compliance work required at the end of each completed plan year. This includes:

• Putting together the year-end census
• Undergoing nondiscrimination testing and making sure mistakes are corrected.
• Assisting with and facilitating the annual 401k audit (if applicable).
• Preparing, signing, and submitting Form 5500.
• Okay, we’re through the administrative responsibilities. Sorry you had to go through that. Next, we’ll talk about another important category of fiduciary responsibilities.

401k Fiduciary Asset Protection Duties

As 401k fiduciary, you have many roles, but one of the most central is protecting plan assets and helping your employees have a safe retirement. To do this, you have to:

Keep unreasonable expenses down

An “unreasonable expense” is conveniently not actually defined, but the Department of Labor gives some advice: keep fees as low as possible.

Whether they’re fund expense ratios or administrative fees, expenses paid out of the plan assets can severely reduce your participant’s savings over time if they get out of control. So it’s your responsibility to ensure that they don’t.

Maintain fidelity bond coverage

Because you’re in charge of other people’s money, your plan must be covered by a “fidelity bond.” Essentially, a fidelity bond is an insurance plan that protects the 401k plan participants in the event of the theft of plan assets.

Generally, the minimum coverage must be 10% of plan assets, or $500,000, whichever is less.

Selecting and Overseeing 401k Service Providers

The final of your primary responsibilities is to select 401k service providers and oversee their performance. By using a fiduciary service provider, you can outsource a fair amount of tedious and time-consuming work, as well as the legal responsibility for fulfilling ERISA-mandated duties.

However (and this is an important ‘however’), the ultimate responsibility is still on the plan sponsor. The plan sponsor has to make sure that the fiduciary is doing their job correctly. Sometimes, this is easier said than done.

At ForUsAll, it’s basically effortless. We provide employers with a real-time dashboard they can log into to see what administrative errors we’ve uncovered in their plan, and what the status is in terms of us fixing those errors.

Remember, no matter who you choose to help you out, the plan is ultimately your responsibility. Even if all the day-to-day is dealt with, making sure the plan is run prudently is still essential.

Types of 401k Fiduciary Service Providers

If you’ve made it this far in the guide, you already know: there are a lot of responsibilities involved in being a 401k fiduciary. How are you supposed to stay on top of these AND maintain your sanity?

A fair question. Luckily, you don’t necessarily have to go it alone.

There are a few different types of fiduciary service providers to help shoulder the work and legal responsibility that comes along with offering a 401k. Here are the main ones:

3(21) and 3(38) Fiduciaries

These fiduciaries are financial advisors that take on fiduciary responsibility for the investment portion of the plan.

In essence, the difference boils down to what level of responsibility and management they take on. A 3(21) fiduciary will act as a “co-fiduciary,” and will advise and recommend funds for your lineup. With a 3(21), the ultimate choice for the funds is still with you as the plan sponsor.

By contrast, a 3(38) takes on the full responsibility for building, monitoring, and maintaining the plan’s fund lineup. So, a 3(38) offers the highest level of fiduciary coverage as it relates to investments.

3(16) Fiduciaries

A 3(16) fiduciary can be one of the most helpful service providers if you are looking to reduce administrative workload and the associated liability. It’s a common misconception that a 3(16) is like a ‘super’ TPA, but that’s not quite the case. A 3(16) fiduciary is responsible for:

• Overseeing the TPA work and results.
• Coordinating with the record keeper.
• Approving loans, rollovers, distributions & QDROs.
• Signing the Form 5500.
• Lots more!

Basically, they handle all the administrative work that the TPA doesn’t do, while also assuming fiduciary liability for making sure the plan is administered correctly.

Conclusion

Aaaand, there you have it: everything you need to know about being a 401k fiduciary. If you made it all the way to the end of the post, we salute you! Deciphering government legalese and truly understanding your fiduciary responsibilities – important as it is – is rather difficult. The only thing more difficult is actually doing the work.

With that said, if 401k compliance and administration is something you’d rather not deal with, check out our solution! We handle nearly all of the work that goes into running a 401k.

The best part?

We offer 3(16) fiduciary services, which means we take legal responsibility for your the work that we do.

With ForUsAll at your side, pretty much all you’ll ever have to do is log into our fiduciary dashboard every so often to make sure your plan administration is going smoothly. Tour our solution today to learn more.

Evan Ross, content guru with San Francisco-based 401k tech company ForUsAll, is on a mission to use the power of storytelling to change the world for the better. And what better way to change the world than to help everyday Americans retire with comfort and dignity?