Are You at Risk When You Sponsor a 401(k) Plan? | Bonus: Printable Checklist
Here’s a short story: A growing painting contracting business with 20 employees in a metropolitan area in the U.S. decides to start a 401(k) plan. The business owner would like a retirement plan that will benefit all employees (including himself). He wants to help everyone prepare for their retirements. He also wants to provide incentives to his employees so that they will have another good reason to stay with his company.
His mom and dad ran the company before he did and he sees that working as painters or support staff late into retirement age is just unrealistic. He also read that 42% of Americans have less than $10K saved for retirement. He’s worried about his employees’ futures.
As he considers the next steps for his company, he speaks to his CPA. The CPA tells him that a 401(k) is a great way to save for retirement and reduce taxes, but has certain requirements. He asks the painting contractor if he’s aware of his fiduciary duties when he opens his 401(k) plan.
What’s a fiduciary?
According to Investopedia, “A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.”
When you start and maintain a 401(k) plan for yourself and your employees, you’re creating fiduciary responsibilities for anyone controlling the plan. The person or entity who assumes this role must enact their responsibilities with constant care and consideration.
According to the U.S. Department of Labor, the following questions and tips may assist with understanding the importance of your 401(k) plan’s fiduciary.
Who will act as your plan’s fiduciary?
When a person or entity takes certain actions that control your plan’s operations, they’re most likely acting as a fiduciary. It’s critical to understand that a person’s title, an entity’s designation, or their perceived roles may not necessarily determine fiduciary status.
How does your fiduciary operate within your 401(k) plan?
Within your written plan document, you must identify at least one fiduciary. Some plan documents may name an outsourced group or a company’s board of directors. Throughout their tenures, all fiduciaries are subject to standards of conduct (see the “What about liability?” section below for more information).
Attorneys, accountants, and actuaries are not generally fiduciaries when acting solely in their standard capacities. As mentioned above, the key to determining a fiduciary is based on the actions they take to control your 401(k) plan’s operations.
Did you know? All actions related to a plan are not necessarily fiduciary in nature; rather, they may be normal business decisions. Here are a few examples:
- Establishing a plan
- Determining the benefit package
- Defining certain features in a plan
- Amending a plan
- Terminating a plan
When you make these and other decisions, you and your staff are acting on behalf of your business, not the 401(k) plan itself. However, when a designated person or entity implements the actions that control your plan, they’re most likely acting as a fiduciary.
What are the most common fiducial responsibilities?
Fiduciaries act as agents for your 401(k) plan participants and their beneficiaries. They’re responsibilities often include:
- Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents
- Choosing the plan investments
- Paying reasonable plan expenses
The duty to be prudent is central to their work. It requires expertise in a variety of areas. If expertise is lacking, you will likely need to enlist professionals or entities to carry out important fiduciary functions.
Practicing prudence also entails recording decisions, including the basis for those decisions. For instance, when considering potential new service providers, your fiduciary should record all related facts, including sharing the same requirements with each candidate. Through clear documentation (and consistent action), fiduciaries can demonstrate prudency.
Following the plan document is also important, as it serves as the foundation for plan operations. Your fiduciary should be familiar with your plan document, and periodically review and maintain it. For example, if an official named in the plan changes, the document must be updated.
Providing a set of reasonable investments for the plan is also key. There should be a consistent and regular process to assess the investments to ensure that they remain viable throughout the life of the plan. Providing too many or too few investments may be a problem. Acceptable charges for the investments should also be key to the choice of the investments within the plan.
What about liability?
As a painting contractor, you face liabilities related to safety, adherence to codes, and financial transactions. Similarly, your plan’s fiduciary will face potential liabilities.
It’s important to note: 401(k) plan fiduciaries who do not follow the basic standards of conduct may be personally or criminally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.
Some contractors transfer fiduciary responsibilities from themselves or staff members by a service provider or group of providers who handle an array of tasks and functions. If you collaborate with an outsourced fiduciary, you’re responsible for your selection of the provider, but may not be liable for their individual decisions. However, you’re still required to periodically monitor the provider to assure proper handling of your plan’s assets and operations.
Should you hire service providers to assume fiduciary responsibilities?
More and more contracting firms are selecting outsourced providers to help with their 401(k) fiduciary responsibilities. Today, small- to medium-sized firms face greater challenges in maintaining their profitable core work, from hiring and firing, to a tsunami of new regulations, to increased competition, and other daily, weekly, and monthly tasks.
If you’ve decided to interview external fiduciaries, be sure to provide each with identical information about your prospective plan. Potential providers should furnish information about their 401(k) plan services and fees. This will assist you in understanding their tasks, assessing the reasonableness of their compensation (direct and indirect), and uncovering any conflicts of interest.
It may be wise to enlist a financial advisor to help with your concerns, considerations, and subsequent plan management. Advisors may be able to act as a co-fiduciary for your plan.
Additional items to consider when hiring an outside fiduciary include:
- How your company wishes to work with them
- Their experience level
- Their technology that will be used
- The breadth of services that can be provided
- Their cyber practices (such as how they protect participant data and plan accounts)
How can you monitor your outsourced fiduciary?
Once you’ve hired an outsourced fiduciary, you’re expected to periodically monitor them (and other service providers). Consider creating a solid review process that can be used at reasonable intervals. Many companies review on a quarterly, semi-annual, or annual basis.
When monitoring service your providers:
- Evaluate notices received regarding possible changes to their services based on changes to government or other regulations
- Review the service providers’ performance
- Read any reports they provided
- Review fees charged
- Ask about policies and practices
- Follow up on participant questions
- Keep your contacts list updated
It’s important to know that as a business owner, you’re not in this alone. There are companies and groups who are dedicated to help with your 401(k) plan’s fiduciary and other needs. Additionally, it’s encouraging to know that the Department of Labor has developed the Fiduciary Education Campaign. The Department of Labor site states:
“The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA), is designed to improve workers’ health and retirement security by educating employers and service providers about their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA).
Plan sponsors and other fiduciaries have a solemn responsibility to protect the interests of the workers and retirees in their benefit plans. The Department’s program “Getting It Right-Know Your Fiduciary Responsibilities” will provide employers and plan officials with an understanding of the law and their responsibilities and will focus on steps for avoiding the most common problems EBSA encounters in its enforcement activities. The program emphasizes the obligation of plan sponsors and other fiduciaries to:
- Understand the terms of their plans
- Select and monitor service providers carefully
- Make timely contributions to fund benefits
- Avoid prohibited transactions; and
- Make timely disclosures to workers and their beneficiaries and reports to the government
The Fiduciary Education Campaign includes nationwide educational seminars and webcasts to help plan sponsors understand rules and meet their responsibilities to workers and retirees, thereby improving their financial security. The campaign also includes educational materials on topics such as understanding fees and selecting an auditor.”