One of my favorite parts of our business is consulting with companies to administer 401(k) plans to give fellow business owners and their employees an efficient and mutually beneficial way to save for retirement.
If you are considering opening a 401(k) plan for your business, it is imperative to understand the difference between a plan sponsor and a plan fiduciary, as each role has specific responsibilities in relation to the plan and its participants.
What Is A Plan Sponsor?
Typically, a plan sponsor is a company or employer that has set up a 401(k) plan to benefit its employees and their beneficiaries. It has the responsibility of overseeing the day-to-day operations of the plan. It must comply with various rules and regulations set forth by the Internal Revenue Service (IRS), the Employee Retirement Income Security Act of 1974 (ERISA), and the Department of Labor (DOL).
There are several duties that a plan sponsor has with respect to a 401(k) plan in that it must:
- Act solely in the best interests of the participants and their beneficiaries.
- Build and monitor an investment fund lineup by offering a broad range of investment options.
- Provide documentation for its decisions.
- Oversee the plan as a whole.
- Keep the plan in compliance by adhering to the plan document.
- Establish the eligibility requirements, contribution limits, vesting schedule, and distribution of plan assets.
- Consider fees and expenses.
- Benchmark fees under ERISA Regulation 408(b)(2).
- Do all of this using the standard of care called the “prudent man” rule, whereas all decisions are made for the exclusive benefit of participants with the skill and prudence of an expert.
While some plan sponsors take matters into their own hands and handle all of these decisions in-house, most will outsource the fiduciary management of the assets in the plan to one or more third parties. Some of these third parties could include:
- Recordkeeper
- Custodian
- Pension Administrator
- Financial Advisor
- Payroll Provider
- CPA or Tax Preparer
- ERISA Attorney
What Is A Plan Fiduciary?
A fiduciary, in general, is a person or organization who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. Plan fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. Most actions needed to administer a qualified retirement plan, like a 401(k) plan, involve fiduciary decisions. This standard is applied whether you hire someone to manage the plan for you or do the plan management yourself.
Fiduciary status is based on the functions performed for a plan and not someone’s title. And, if a plan sponsor hires someone to perform a particular fiduciary function, then that, in and of itself, is considered a fiduciary act. If you are named as a fiduciary to a 401(k) plan or name yourself (as we choose to do!), you must do the following:
- Act solely in the interest of the participants and their beneficiaries.
- Act for the exclusive purpose of providing benefits to employees participating in the plan.
- Perform duties with the care, skill, prudence, and diligence of a prudent person familiar with such duties (i.e., “prudent man” rule).
- Follow the plan documents as they are written.
- Diversify plan investments.
- Monitor expenses of the plan.
What Is The Difference Between The Two?
All plan sponsors are plan fiduciaries, but not all plan fiduciaries are plan sponsors.
A plan sponsor is a plan fiduciary since the act of administering the plan alone causes a duty to act in the best interests of the participants and their beneficiaries. This holds true when the plan sponsor either administers the plan itself or hires another party to do it for them.
However, some plan decisions would be considered business decisions rather than fiduciary decisions and, therefore, would not cause a plan sponsor to function as a plan fiduciary. These would include the decision to establish a plan, include certain features within the plan, and amend or terminate a plan.
When a plan sponsor makes these decisions, they act on the business' behalf and not the plan and would not be considered a fiduciary. However, as soon as the plan sponsor takes steps to implement these decisions, it (or any other party hired to perform these functions) would be considered a plan fiduciary.
Who Is Not Considered A Fiduciary?
Only some people who interact with a 401(k) plan are considered a fiduciary. For example, accountants, some recordkeepers, attorneys, consultants, and employees who perform administrative functions within a framework of policies are not ordinarily considered plan fiduciaries.
Let’s Talk
Note that a plan sponsor can limit their fiduciary responsibility, but they can never eliminate it. That’s where we come in.
As a plan sponsor, you have a legal fiduciary responsibility that must be fulfilled. We know what your obligations are and can help maintain compliance with the governing agencies, and act as co-fiduciary to minimize your personal liability.
If you are looking to partner with a credentialed, caring, and seasoned 401(k) consulting firm, please schedule a meeting here.