As I speak with business owners and plan sponsors about 401K plans, I have noticed that for many the term Fiduciary is the most misunderstood. It’s concerning, because if the Plan Fiduciary is not set up and administered properly, there is significant risk to the business and the participants.
So let’s break down the 4 questions I hear most often and give you the information you need to make informed decisions.
What or who is a 401k Plan Fiduciary?
The Fiduciary is a person or a group of people that can be classified in a retirement plan as the “acting representative” for the company responsible for making decisions on plan administration, plan management, plan assets and outside service providers.
What are the responsibilities of a Fiduciary?
Once classified as a Fiduciary, your primary responsibility is to make plan decisions that are – first and foremost – in the best interest of participants and beneficiaries within your 401k plan.
Some of your primary responsibilities would include:
- providing reasonable plan expenses
- diversifying plan investments
- avoiding conflicts of interest
- following the terms of the plan document
- doing your diligence on plan decisions
Another Fiduciary responsibility 401k plan sponsors sometimes overlook is sending employee contributions to their designated mutual funds within a specific time frame. The IRS requires these contributions to be deposited to the mutual funds no later than the 15th business day of the month following the paycheck from which they were taken. For example, contributions taken from a paycheck that was dated the 1st of the month, should be deposited on the 16th day of that month.
I recently met with a company with a weekly payroll cycle that thought depositing employee contributions at the end of the month was in compliance. This can be an expensive mistake to fix if the plan is audited.
How can I reduce my/our Fiduciary liability?
There are several options that will help limit your Fiduciary liability:
- Document the decisions that are made on behalf of the plan and the rationale behind that decision.
- Make sure your 401k plan is 404(c) compliant. This is important because it protects plan sponsors from employees making poor investment choices.
- A 316 Plan Administrative Fiduciary partner can sign and file your 5500-tax form, approve loans and distributions, and some can send required annual disclosure notices to employees on your behalf.
- A 321 Investment Fiduciary helps reduce your Fiduciary role in the plan because they act as a Co-Fiduciary. They work with you and your investment committee in selecting your investment offering. While they can implement an ongoing process to monitor the funds and assist on adhering to your investment policy statement, you will need to approve the investment lineup and mutual fund changes.
- A 338 Investment Fiduciary constitutes giving an advisor full discretion over your plan investments while reducing your fiduciary liability. The 338 fiduciary role allows the advisor to select, monitor and change your investments within your 401k plan without your final approval.
- Fiduciary Insurance is not legally required in a 401k plan, believe it or not. Companies concerned about the personal liability for mismanagement, negligence and other actions that are not in the best interest of plan participants and beneficiaries can opt to carry this protection. Word of caution: if you choose to add insurance be aware not everything may not be covered. Talk with your business insurance agent to discuss coverage options.
Which type of Fiduciary do I need?
It is primarily determined by the level of work and risk your company plan sponsor is willing to take on. Here’s a brief summary to help guide your search:
- A 316 Plan Administrative Fiduciary helps manage necessary paperwork and compliance monitoring, but they play no role in the selection or management of plan investments.
- A 321 Investment Fiduciary assists with the investment offering selection process, but still requires Sponsor/Committee approval on all plan changes.
- A 338 Investment Fiduciary fully manages the 401K plan investment portfolio and has been granted the authority to make changes without prior approval of the Sponsor/Committee.
Managing a 401K plan can be a daunting task without the proper guidance, resources and protection along the way. With the right team, planning and procedures, the role of Fiduciary can provide peace-of-mind to everyone involved.
Call me today and I’ll walk you through a 401K Fiduciary solution to lower your risk and personal liability. Your employees retirement-readiness is dependent on a well-managed 401K plan.
For the free fiduciary checklist, click here.