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Your “Fiduciary Duty” as a 401k Plan Sponsor

401k - Fiduciary - small business owner

If your small business has a 401k or other type of Retirement Plan, you are likely considered a “Fiduciary” under ERISA. The term “Fiduciary” spans multiple disciplines and takes on many different forms. For 401k Plans, the DOL’s definition of Fiduciary is what matters. This requires not just certain actions on your part, but also specific records that you need to keep.

The most basic definition of a Fiduciary is a person tasked with handling matters (usually financial in nature) who is legally bound to act in the “best interest” of the person benefiting from those matters. So how does this relate to a small business owner and their 401k Plan? As the owner, usually you are what is called the “Plan Sponsor”. This means you are the decision maker for the 401k Plan. Legally, you are required to act in the “best interest” of the Participants (as a whole) in the Plan. This is called your “Fiduciary Duty” to the Plan.

It seems like a fairly straightforward concept. Obviously most every business owner wants to do what is best for the employees who participate in the 401k Plan. But the DOL expects the business owner to take certain steps to ensure the Plan is competitive, maintained properly, and fits employees needs. And just like the IRS can audit your taxes; the DOL can audit your 401k Plan to make sure that this and other requirements have been met each year.

Most business owners are not retirement plan experts… and can’t be expected to be an expert. That is why you hire experts (like myself) to guide you through the process. When you do that, some of the liability and responsibility is offset onto those experts. But that in no way fully absolves you from your Fiduciary liability related to the Plan. So let’s take a look at how a small business owner can make sure they are fulfilling their Fiduciary Duty to the 401k Plan.


Yearly & Quarterly Reviews

Most Plan Sponsors (business owners) do a yearly review of their Plan. If you do not, then this is a huge red flag and you should immediately have your 401k Plan Benchmarked. But there is a specific set of criteria you should review each year. This review process should be documented.

Then there are the Quarterly Investment Reviews that are considered “best practice”. Just like a normal investment portfolio, the Plan Sponsor is required to review the investment options on at least a quarterly basis. This review should be documented as well. Unless you are a licensed investment professional, this function should be outsourced to an Adviser who specializes in 401k Plans, DOL guidelines, & ERISA Law.

A good 401k Adviser will make this a seamless process for the business owner. They will include quarterly investment reviews as part of the services they offer. They will also proactively create a yearly report that “Benchmarks” the 401k Plan. This 401k Benchmark Report compares your Plan to the industry average for 401k Plans of similar size and in similar industries. This yearly Benchmark Report should be kept in your 401k Compliance Folder.


Day to Day Functions & Administration

This aspect sounds like a “no brainer”. But I promise it is not. When there are mistakes that must be corrected, more often than not it stems from administrative issues within the business. There can be paperwork to process, forms to sign, questions to answer, forms to send out, etc.

Something simple, such as waiting too long to sign a Transfer of Funds form, can cause issues that require corrections to the Plan to be made. Often those corrections are monetary in nature. The Plan (the business) can be responsible for lost earnings, penalties, and extra administrative fees.

Long story short, anything related to your 401k Plan must be processed in a timely manner. If it is not, you are in possible breech of your Fiduciary Duty.


Service Providers & types of Fiduciaries

The main Fiduciary, often called the Plan Fiduciary or Named Fiduciary, is almost always the Plan Sponsor. Only in very rare circumstances is the role of Plan Fiduciary outsourced. This happens almost exclusively in the ultra-large 401k Plan market. But a small business owner is able to greatly reduce their Fiduciary burden by using the right 3rd party service providers and advisers.

There are 4 main “types” of Fiduciaries within a 401k Plan. We have covered #1, the Plan Fiduciary. The other types of Fiduciaries within the Plan can be outsourced to professionals.

The 3(16) Fiduciary – This Fiduciary capacity covers administrative functions of the Plan. The 3(16) Fiduciary contractually accepts the legal liability that goes along with the “core” administration functions. These functions are almost always performed by a Service Provider of some type, usually a TPA or the 401k Provider. But it is not usual for them to accept full Fiduciary Liability for performing those functions for the Plan. In fact, most service providers include language in their contracts that specifically excludes them from accepting any Fiduciary Liability for the Plan. In other-words, the 3(16) Administrator is playing with skin in the game.


The 3(21) Fiduciary – This relates to the investment lineup. A 3(21) Fiduciary accepts most of the legal liability related to the investment lineup of the Plan. The caveat is that you must accept their recommendations for that liability protection to remain in place.

Plan Level 3(21) Fiduciary- In this role, the Adviser lists a large selection of various funds to choose from. As long as the Plan Sponsor chooses funds off of the Advisers list

The 3(38) Fiduciary – This relates to the investment lineup. A 3(38) Fiduciary has complete and sole discretion on which funds are used. This function must be performed by a Fee Based Investment Adviser. They contractually accept the full legal liability that goes along with choosing and managing the funds.

There are two different types of 3(38) Fiduciary Services:

Individual 3(38) Services: In this role, the Adviser manages the employees portfolio for them. Portfolio Allocation is based on the persons age, risk tolerance, & 401k Best Practices. The funds are reviewed and changed as needed for the individual on a quarterly basis. This is an optional service for participants that does often cost extra for them to participate in.

Plan Level 3(38) Services: In this role, the Adviser manages the overall fund lineup of the Plan. Funds are reviewed and changed as needed on a quarterly basis. The fund lineup chosen is based on 401k Best Practices.


3(21) Fiduciary – This is also related to the investment lineup.