Setting up a 401(k) retirement plan for your company has multiple benefits for everyone involved — including the company, employees, and the company owners as well. If you are considering becoming a plan sponsor or already have this responsibility, it’s important to understand how your role forms part of the chain of management in the account and fiduciary behaviors that will be expected from you in that particular role. Read on to find out all you need to know about acting as a plan fiduciary.
What is a Plan Sponsor?
As an employer or the owner of a company, you likely offer several benefits to your employees — such as a healthcare plan, retirement plan, and/or pension plan. Retirement plans can also be set up by unions or professional organizations. When you are the person who establishes a retirement savings plan, you become the plan sponsor. The plan sponsor has several responsibilities, including:
- Setting up the parameters for membership
- Choosing investments
- Potentially making cash and/or stock contributions to your employees’ investments
Because such plans relate to retirement savings, they are subject to the Employee Retirement Income Security Act of 1974 (ERISA), which lays out strict fiduciary standards for how these funds must be run.
Understanding the Fiduciary Duties of a Plan Sponsor
Typically, the company owner or person who sets up a retirement plan works as the “Fiduciary-in-Chief,” in collaboration with a 3(16) Plan Administrator who helps with plan operations and a 3(21) Investment Advisor and 3(38) Investment Manager who are responsible for the management of assets. The Plan Administrator is named on the plan with the Named Fiduciary and can be thought of as the plan’s “Chief Operating Officer.”
In accordance with ERISA, the named plan fiduciary is bound to the following five standards:
1. DUTY OF LOYALTY
Act solely in the interest of the plan participants.
2. DUTY OF PRUDENCE
Act as a financial expert as well as a plan sponsor, with care, skill, and prudence. Ignorance is no defense when you are managing other peoples’ investments.
3. DUTY OF DIVERSITY
Minimize the risk of large losses by diversifying your investments.
4. EXCLUSIVE PURPOSE
Act in the best interest of participants by providing benefits and paying only reasonable expenses with assets taken from the plan itself.
5. PLAN GOVERNANCE
Act strictly in accordance with the established documents and instruments.
Where Can a Plan Fiduciary Get Assistance?
As you can see, the responsibilities of a plan sponsor are complex and must be carried out with the utmost care and skill to ensure the best result for participants while preventing legal problems in the future. Fortunately, there are several people who typically assist with the day-to-day management of a retirement savings scheme:
While the Plan Administrator is named on the plan, this person will often hire a record keeper and a Third Party Administrator to perform ministerial services at the Plan Administrator’s direction. As these parties simply put the Plan Administrator’s decisions into action, the fiduciary standards do not apply to them.
Asset Management Assistance
In contrast to the administrative parties, the investment manager and investment advisor are bound by fiduciary duty together with the plan sponsor and must act in accordance with the plan participants’ best interests. Hiring such third-party investment advisors is a sensible move to ensure you’re meeting your duty of prudence — especially if you have not been trained in research-based investing or don’t have a lot of time to dedicate to the task.
In a normal setup, the 3(21) Investment Advisor will share fiduciary duties with the Named Fiduciary for choosing the strategies that the plan will follow. The 3(38) Investment Manager also has a fiduciary duty as they select and monitor the investment options offered to participating employees.
Refer to the following table to understand how investment tasks are divided between the Investment Advisor and the Investment Manager:
|3(21) Fiduciary Investment Advisor||3(38) Fiduciary Investment Manager|
|Acknowledges fiduciary status in writing||Acknowledges fiduciary status in writing|
|Helps the plan sponsor to select an appropriate Investment Manager||Drafts the Investment Policy Statement|
|Ensures that the Investment Manager meets their responsibilities||Selects the plan investments at their professional discretion|
|Provides investment education to the plan participants||Selects and monitors the investment funds offered to plan participants|
|Keeps records and monitors the performance of the retirement team||Creates professionally-managed portfolio options that participants can select based on their individual risk tolerance|
|Reviews and discusses Investment Reports||Designates the plan’s qualified default investment alternatives|
What Happens if a Plan Fiduciary Fails to Meet the ERISA Standards?
When you sign on as a plan sponsor, you become personally liable for the decisions that you make, according to fiduciary standards. The only way you can protect yourself is to understand your duties thoroughly and act in the best interests of the plan participants every single time. Examples of actions that are prohibited for fiduciaries include:
- Dealing with plan assets in your own interest
- Realizing transactions that benefit a third party rather than the plan participants
- Realizing transactions that will earn you a kickback or a commission
- Making transactions between a plan and its fiduciaries, with the exception of transactions that fall under a specific ERISA or Department of Labor exemption
Ensure that You Meet Fiduciary Standards with M&R Wealth Management
Whether you’re already a plan sponsor or thinking of establishing a plan for your employees, put your best foot forward by consulting with the experienced wealth management advisors at ML&R Wealth Management LLC. Since 1997, we have been helping businesses in Austin, Texas set up effective fiduciary retirement savings plans using tried-and-tested, research-based investment strategies.
Contact a team member today to set up your free initial consultation and learn how we can help you succeed as a plan fiduciary for your company’s retirement savings plan.