What to Consider When Choosing a 401(k) Plan Recordkeeper
Selecting the right recordkeeper is important to the success of your 401(k) plan.
A service provider who understands 401(k) plan administrative requirements and operational compliance can save you time, worry, and money. When you combine quality service with thoughtful plan design, appropriate investment options, and effective employee communications, you can drive strong savings behavior and increase the chances for a financially secure retirement for you and your employees.
Prudently selecting a provider to help administer your plan and safeguard your employees’ retirement savings is also part of your fiduciary responsibility as the plan sponsor. Under ERISA, every plan must have at least one “named fiduciary.” The employer is typically the named fiduciary with overall responsibility for the plan. The plan must also designate an ERISA 3(16) plan administrator. This fiduciary has discretion over how the plan is operated and is often responsible for hiring service providers to help administer the plan and ensure that plan notices and disclosures are properly delivered. Most plan documents also name the employer as the ERISA plan administrator.
As a fiduciary, you must adhere to high fiduciary standards in carrying out your responsibilities. This includes acting in the best interests of your participants and making sure only reasonable and necessary fees are paid from plan assets. Fortunately, there are skilled recordkeepers and other service providers to help you administer your 401(k) plan and meet your fiduciary responsibilities.
401(k) Plan Services and Who Provides Them
So how do you find the 401(k) plan recordkeeper that’s right for you? One of the first steps is to understand what type of services you need and who provides them. A successful 401(k) plan typically requires four types of services:
- Plan recordkeeping and administrative support
- Participant services (account access and education)
- Operational compliance support (plan documents and nondiscrimination testing)
- Investment selection and monitoring
Traditionally, different types of providers offered different types of services for 401(k) plans. Here are general definitions of 401(k) plan service providers:
Recordkeeper – A recordkeeper is the bookkeeper for the day-to-day activities of the plan. This includes tracking participant activity such as deferral elections and investment allocations. A recordkeeper also tracks employer contributions and investment gains and losses. Most recordkeepers provide access to a platform of investments that can be selected by the plan fiduciary and made available to plan participants. Providing an easy-to-use and engaging website for participants and employers to access information and transact plan business is a critical element of recordkeeping services. A recordkeeper generally does not assume fiduciary responsibility for the plan but takes direction from the employer sponsoring the plan.
Third Party Administrator (TPA) – A TPA provides compliance support to the employer and helps ensure the plan operates in accordance with the rules. This can include drafting and amending plan documents, conducting nondiscrimination testing, and filing an annual Form 5500 on behalf of the plan. In some cases, the role of the TPA and the recordkeeper may be filled by the same entity. Some TPAs also offer investment support services and may derive a portion of their revenue from the sale of investments. Most TPAs perform their administrative services at the direction of the employer and are not considered fiduciaries. However, some TPAs take on the role of the ERISA 3(16) plan fiduciary relieving employers from the fiduciary responsibility for certain plan operations.
Trustee – 401(k) plan assets must be held in a trust for the benefit of each participant (unless the assets consist only of insurance contracts). A trustee is typically named in the plan document or a trust agreement. Some employers choose to serve as the plan’s trustee, referred to as a self-trusteed plan. In other cases, a separate entity such as a trust company will be appointed to assume legal title to the plan assets and to provide annual trust or account statements. All trustees are considered to be plan fiduciaries and are subject to strict standards when handling the assets of 401(k) plan participants.
Financial Advisor – A financial advisor typically serves as an employer’s investment expert. The financial advisor may also help employers identify their objectives for sponsoring a retirement plan and then help determine the types of services and service model that will meet those objectives. Financial advisors are also typically involved in employee enrollment meetings and providing additional employee education.
Those who advise on investments may take on a fiduciary role, serving as either an ERISA 3(21) investment advisor (makes recommendations) or an ERISA 3(38) investment manager (has discretion to select investments for the plan).
To Bundle or Unbundle?
In today’s market, one entity may fill more than one service provider role for a retirement plan. There are multiple combinations of services possible, depending on the provider and their affiliates. For example, a recordkeeper may also serve as the TPA, or an investment provider may provide recordkeeping services.
Some service providers coordinate their services to present a comprehensive solution, known as a bundled service model. For example, a single entity may design a product that includes all facets of retirement plan services – fiduciary investment support, plan documents, recordkeeping, and compliance support. Or a service provider may choose to bundle just a few services such as the recordkeeping and TPA functions. Other providers specialize in just one area of 401(k) plan servicing and don’t affiliate with any other providers. With these types of unbundled providers, the employer is responsible for selecting and engaging independently with each provider and monitoring their performance.
A Prudent Process
Looking for a 401(k) plan recordkeeper or considering whether you want to change recordkeepers is a fiduciary function, so it’s important to follow a careful process and document your decisions. Consider whether you can manage a group of independent service providers or would benefit from a bundled service model.
You may want to start by reviewing a provider’s service agreement to identify the specific services that will be provided, including whether the provider is assuming a fiduciary role as part of those services. Compare multiple providers’ services and fees, so you understand what fees are reasonable in the industry for your plan size and the types of services and features that are most important to you and your participants.
Here is a list of elements you may want to consider when evaluating service providers:
Types of Services Offered
- Scope of recordkeeping and administration support
- Compliance support such as plan documents and nondiscrimination testing
- Investment advise or support – at the plan level and the participant level
- Fiduciary services (ERISA 3(16) plan administration, ERISA 3(21) investment advice, or ERISA 3(38) investment management)
- Employee education programs or employee communication support
- Online account access and phone/email support services
- Costs for plan services and investments
- Transparency of fees
- Payment structure (e.g., can fees be paid by the business or debited from participant accounts? Are fees paid through a revenue sharing arrangement?)
Qualifications of Provider
- The depth of technical expertise within the organization
- Experience with plans having similar characteristics
- Service levels promised, such as turnaround times for common transactions
- The investment approach or philosophy
- The sophistication of technology and online tools
- Referrals or recommendations from other clients
Ready for a Better 401(k)?
Betterment for Business offers a bundled approach to servicing 401(k) plans, so you don’t need to navigate through multiple providers’ service models and fee structures or worry about gaps in services. We specialize in servicing small businesses for low cost to save you money. And our digital platform makes it easy for you to set up and maintain a 401(k) plan and for your employees to access their account balances and investments. We’re committed to being here for you every step of the way with expert investment and administrative support, including fiduciary 3(16) and 3(38) services.