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Guide to Meeting Your 401(k) Fiduciary Responsibilities

Outlining how you can fulfill your 401(k) fiduciary responsibilities.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Apr. 16, 2020
Published Apr. 16, 2020
7 min read

If your company has or is considering, a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does it mean to you as a 401(k) plan sponsor? Simply put, being a fiduciary means that you’re obligated to act in the best interests of your 401(k) plan participants.

It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face serious legal and financial ramifications. To help you avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities.

A brief history of the 401(k) plan and fiduciary duties

When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct.

Among other responsibilities, fiduciaries must always act in the best interests of employees who save in the plan and avoid conflicts of interest. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code.

The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties and even shoulder some of the responsibility for you.

Key fiduciary responsibilities

Even if you’re a business owner with a small 401(k) plan, you still have fiduciary duties. By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities:

  1.   You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments.
  2.   You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated.

401(k) fiduciary responsibility checklist

As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when making decisions about plan operations. As a 401(k) fiduciary, you must follow five cornerstone rules:

  • Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries.
  • Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers.
  • Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets.
  • Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA).
  • Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, including collecting fee disclosures for investments and service providers, and comparing (or benchmarking) fees to ensure they are reasonable.

You don’t have to pay a lot to get a quality 401(k) plan

Betterment’s fees are well below industry average, and we always tell you what they are so there are no surprises for you—and more money working harder for your employees. Plus, as a 3(38) fiduciary, we can help you limit your risk exposure so you can focus on running your business—not on worrying about your investments.

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Why it’s important to fulfill your fiduciary duties

Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue.

Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to:

  • Restore plan losses (including interest)
  • Pay expenses relating to correction of inappropriate actions.

While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment.

How to be the best 401(k) fiduciary you can be

Now that you understand what a 401(k) fiduciary is, you may be wondering how to best fulfill your fiduciary responsibilities. Here are some tips:

  1. Pay reasonable fees—As you know, fees can really chip away at your participants’ account balances—and have a detrimental impact on their futures. So take care to ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. Your 401(k) provider should be able to assist you with the benchmarking process.
  2. Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size:
  • Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages.
  • Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days.

For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then.

  1. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to guide you through the process.

It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as safe harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits.

  1. Follow the plan document—It’s important to know your plan document. In fact, the IRS mandates that 401(k) plans operate in accordance with the terms of its written document to maintain its tax-favored status and prevent a breach of fiduciary duty.

Make a mistake? The IRS considers the issue an “operational defect,” and your 401(k) plan can be disqualified for not fixing the problem in a timely manner. However, the IRS offers a handy 401(k) Plan Fix-It Guide to help you resolve any issues that crop up.

  1. Select prudent investments—Unfortunately, there can be many hidden fees buried in plan investments, so it’s critical to be vigilant about those you select. In addition to fee considerations, you must also think about whether they meet your plan’s investment objectives. Wondering which investments you should choose? Betterment can help.

In fact, most companies hire one or more outside experts (such as an investment advisor, investment manager, or third party administrator) to help them manage their fiduciary responsibilities.

Get help shouldering your fiduciary responsibilities

When it comes to managing your fiduciary responsibilities, you don’t have to go it alone. However, the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring your plan’s investment professionals and administrators.

How much support is right for you?

For most employers, day-to-day business responsibilities leave little time for extensive investment research, analysis, and fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties or even plan administration responsibilities. Take a look at the chart below to see the different fiduciary roles—and the implications they have for you as the employer:

 

Defined in ERISA section Outside expert Employer
No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability
3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion
3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility
3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibility

Betterment can help

When you appoint an ERISA 3(38) investment manager like Betterment, you fully delegate responsibility for selecting and monitoring plan investments to the investment manager. That means less work for you and your staff, so you can focus on your business.

In addition to assuming fiduciary responsibility for your investment options, Betterment offers:

  • Consultative plan sponsor support—As a total 401(k) solution, we are your full-service partner providing everything from fiduciary services to plan design consulting to ensure your 401(k) is fully optimized.
  • Personalized employee guidance—Our action-oriented approach to financial wellness enables your employees to make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. Plus, we link employees’ outside investments, savings accounts, IRAs—even spousal/partner assets—to help them see the big picture.

And we do it all for fees that are well below industry average.

Want a better 401(k)?

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