Fiduciary Responsibility for 401(k) Plans

Many people view plan documents as word processing forms, plan design as “fill-in-the-blank,” plan administration as pushing the right button on a computer, and 401(k) investments as nothing more than a group of mutual funds.

Unfortunately, that viewpoint underestimates the difficulty (and the importance) of properly designing and operating a 401(k) plan.

To unlock the full value of a retirement plan, it must be designed to fit the workforce and the budget of the sponsoring employer. The documents need to be tailored to that design.

Finally, the plan’s investments must be properly selected and monitored to provide superior retirement benefits. These steps are critical for both legal compliance and employee satisfaction.

In other words, quality advice and good service can make a difference…and can help deliver a benefit that serves the sponsor’s needs and is appreciated by its employees.

The Fiduciary Requirement

But, it goes beyond that. ERISA imposes a fiduciary responsibility on employers to prudently operate their plans and manage the investments. While large companies have financial executives and in-house benefits staffs, small and mid-sized companies must rely on outside help–from their plan administrators and other advisors.

Employers are free to design their plans to accomplish their business objectives–subject to the Internal Revenue Code’s tax qualification rules. However, once designed, plans must be operated under ERISA’s fiduciary rules for the exclusive benefit of the participating employees.

This newsletter discusses some of ERISA’s most important fiduciary rules:

  • Who are the responsible fiduciaries?
  • Selection and monitoring of investments.
  • Accurate and complete administration.
  • Reporting and disclosure requirements.

Who Are the Responsible Fiduciaries?

When an employer establishes an ERISA plan, it is the initial fiduciary. The employer needs to decide whether to appoint individuals or committees to be responsible for those duties. If a plan committee is appointed, then the committee members are fiduciaries and must perform their duties under ERISA’s “prudent expert” standard. If the employer keeps some or all of those duties, its officers or principals who perform those duties are ERISA fiduciaries.

Further, the appointment of a fiduciary is itself a fiduciary act. So, whoever appoints the officers or committee members has a duty to prudently select those persons and to periodically review their work to make sure they are doing their job. Typically, it is the Board of Directors or corporate president who appoints the fiduciaries. As a result, the Board members or the president are also fiduciaries.

In order for the directors, officers and committee members to perform their duties competently, they must know the answers to these questions:

  • Am I a fiduciary?
  • What are my responsibilities?
  • How do I fulfill those duties under the law?

As fiduciaries, the officers, directors and committee members must perform their duties in a knowledgeable, careful and skillful manner. Those duties include:

  • Operating the plan according to its terms;
  • Overseeing the plan’s investments;
  • Making sure participants receive the information required by ERISA; and
  • Filing the necessary government reports.

This requires a knowledge of the rules governing retirement plans and the technical skills needed to comply with those laws. Fortunately, the fiduciaries can rely on competent outside advisors–such as third party administrators–to help with those jobs.

Selection and Monitoring of Investments

The selection of investments for participant-directed 401(k) plans requires that the officers or committee members answer the following questions:

  • Is each investment option prudent and suitable for the participants?
  • Do the funds, in the aggregate, constitute a broad range of investment options?
  • Is the investment package suitable for the abilities of the particular workforce–or, if not, can it be made so through offering investment education or advice to the participants?

Fiduciaries have a duty to monitor the funds and to remove any funds that don’t perform well. Some investment providers (such as insurance companies, mutual fund companies and banks) help fiduciaries by giving them performance, expense, benchmark and other information and by removing underperforming funds from their investment packages.

Other advisors, such as investment consultants, can help the fiduciaries evaluate the investments being offered to the participants.

Accurate and Complete Administration

The fiduciaries are responsible for overseeing the administration of the plan. The fiduciaries need to understand the legal requirements for retirement plans and to monitor compliance with those requirements. There are many aspects to plan administration including:

  • Enrolling and covering the right employees.
  • Selection and monitoring of the administration firm.
  • Correction of problems.
  • Handling IRS audits and DOL investigations.
Enrolling and Covering the Right Employees

Covering the right employees is essential to the proper administration of a plan. Two important areas where employers need advice are:

  • Is the plan sponsor a member of a controlled group or affiliated service group, requiring that employees of other companies be considered for testing or inclusion in the plan?
  • Are there other workers, such as temporary employees, leased employees or misclassified independent contractors, who may be entitled to benefits under the plan? Is the plan properly drafted to exclude those workers if they are reclassified as common law employees?

Just asking the questions, however, is not enough. The issues are fact-intensive and the analysis is complex. For example, the analysis of a potential affiliated service group–and its consequences and planning alternatives–requires knowledge of Internal Revenue Code provisions, and an understanding of the ownership of the entities and how they work together to provide their services to their customers.

How does a plan sponsor know to ask the right questions and, once asked, to analyze the answers? The failure to do so can result in disqualification of the plan or in a costly correction. In order to identify and respond to those issues, plan sponsors need help from their advisors.

Plan sponsors face another important coverage issue–how to educate the employees about the plan, the importance of making deferrals into the plan and the 401(k) investment alternatives. Without participation by the rank-and-file employees (or substantial contributions by the employer), the officers or principals of the sponsor will be limited in their ability to defer and the value of the plan will be diminished.

Employee participation is a function of thoughtful plan design, good communication, quality investments and effective face-to-face enrollment meetings. The plan fiduciaries should work with their advisors to make sure the employees are given clear and thorough explanations of the requirements to participate, the importance of deferring and the basics of investing.

Selection and Monitoring of the Administration Firm

The fiduciaries have a duty to prudently select and monitor the firm that provides administrative services to their plan. The fiduciaries should ask these questions:

  • What services are needed?
  • Are the services performed well, and are they timely and accurate?
Correction of Problems/Handling IRS Audits and DOL Investigations

In a perfect world, there would not be any problems. But inevitably, problems do occur. Employers and plan fiduciaries need help in correcting those problems.

Plans are regularly audited by the IRS and investigated by the DOL. While most employers will only experience one or two government audits over the life of a plan, administrators regularly help their plan sponsors respond to government inquiries and to navigate through that difficult process. That experience can be invaluable to a plan sponsor.

Other Administrative Issues

Other important administrative issues are:

  • Who is responsible for making sure that “excess” amounts are not being contributed to the plan–that is, amounts that violate the 415 limits on allocations, the 401(a)(17) limits on compensation, the 402(g) limits on deferrals, and the ADP and ACP limits on deferrals and matches for highly compensated employees? And, if excess amounts are contributed, who decides on the best method of correction? How is that decision made?
  • Who determines eligibility of employees to participate in the plan? If a mistake is made, how does it get corrected?
  • What are the criteria for a hardship withdrawal? What steps must the fiduciaries take to comply with the qualification rules in approving a request for a hardship withdrawal?

A plan sponsor should be able to rely on its administration firm to do most of this work and to provide advice to the employer on the decisions it must make.

Satisfying the Reporting and Disclosure Requirements

ERISA imposes a number of reporting and disclosure requirements on 401(k) plans. For example, plan sponsors and fiduciaries must file an annual report, Form 5500, with the government each year. In addition, participants must be given summary plan descriptions (SPDs), statements of material modifications (SMMs), and summary annual reports (SARs) at specified times. Participants must be given information about their benefits upon request and, if the plan wants 404(c) fiduciary protection, participants are entitled to detailed information about the plan and its investments. An ERISA fidelity bond must be obtained and, in some circumstances, a plan must be audited annually by an independent CPA.

It is almost impossible for small and mid-sized employers to know these rules. As a result, plan sponsors need help in complying with the reporting and disclosure requirements.


The administrative and investment duties of employers and their fiduciaries are numerous and complex. The failure to comply with ERISA’s rules can result in penalties, government audits and even liability. Fortunately, with help from advisors, ERISA can be a map to compliance, rather than a trap for the unwary.


This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.

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