Every 401(k) plan has at least one person who handles administering the plan and investing its assets. This role is known as plan fiduciary and it carries with it important responsibilities, including avoiding conflicts of interest, following good investment practices and generally protecting the interests of employees who contribute money to it. The employer sponsoring the plan may be the only fiduciary or duties may be spread among several entities including third parties. Often a financial advisor is a key member of the plan’s fiduciaries.
401(k) Fiduciary Basics
Employer-sponsored retirement benefits like 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA), a 1974 federal law that also defines the responsibilities of plan fiduciaries. It’s important for fiduciaries to be held to a standard of conduct because employees often have little awareness of what goes on behind the scenes at the plan and need someone to protect their interests.
A fiduciary is created anytime someone has control of assets belonging to someone else. For a variety of financial professionals, including many financial advisors, fiduciary duty is defined as having duties of care and loyalty to the asset owners. In the case of a retirement plan, these are the employees. A fiduciary’s responsibility is generally to act always in the client’s best interests.
When it comes to 401(k) plans, ERISA requires at least one fiduciary to be named in the documents for each plan. The employer is a fiduciary and other company officer as well as outside parties such as financial advisors and third-party plan administrators could also be named fiduciaries.
There may be other un-named fiduciaries, as ERISA defines a fiduciary as anyone, named or not, who has discretionary control over administering the plan, provides advice for a fee or decides how to invest its assets. Attorneys, accountants and similar professional advisors are not usually considered fiduciaries, however, as long as they don’t exercise control over the plan.
401(k) Fiduciary Responsibilities
For some plans, the fiduciary responsibilities are shouldered entirely by the employer. Others may split responsibilities among up to three different types of fiduciaries. These three types, all named after sections of the ERISA law that describe them, are 3(16), 3(21) and 3(28) fiduciaries.
The three types correspond to major areas of 401(k) management. Specifically, 3(16) fiduciaries oversee administration, communicate with participants, enroll members and submit required reports. A 3(21) fiduciary provides financial advice, recommending how plan assets will be invested. A 3(28) fiduciary actually implement investment decisions, with the authority to buy and sell investments with plan assets.
Whether named or un-named, in-house or third party or working on the administrative or investment end, 401(k) fiduciaries have some specific responsibilities as laid out by the law on retirement plans. These include:
- Acting only in the best interest of plan members
- Showing prudence in carrying out their duties
- Acting in accordance with the plan documents
- Managing risk by diversifying plan investments
- Limiting plan expenses to a reasonable level
While those are broad requirements, some decisions relating to the 401(k) plan don’t have to fulfill the fiduciary responsibilities. For instance, an employer is not acting as a fiduciary in deciding to set up a 401(k) plan, choosing benefits and features of the plan, changing the plan or terminating the plan. The reason is that these decisions affect the business more than the plan participants, so the employer does not have a fiduciary duty to the participants. A third party hired to carry out similar decisions may, however, be deemed to have fiduciary responsibilities.
Fiduciary Responsibility Enforcement
Making an investment recommendation that doesn’t work out well is not necessarily a violation of fiduciary responsibility, as long as the advice was rendered prudently and without a conflict of interest. A recommendation that generates a commission for the fiduciary could be impermissible if a better investment commission-free were available, however.
Plan participants who think a fiduciary has failed to fulfill their responsibilities can complain to the federal Employee Benefits Security Administration (EBSA) The penalties for violations can include fines and imprisonment.
The Bottom Line
A 401(k) fiduciary is anyone who has discretionary control over the plan’s assets or how it is administrated. This includes jobs such as enrolling members and making investment recommendations as well as actually buying and selling investments. Fiduciaries to 401(k) plans are required by law to act in the best interests of plan participants, to make decisions prudently, adhere to the plan documents and follow sound basic investment practices such as diversifying and paying only reasonable fees.
Tips for Retirement Planning
- A financial advisor can help you evaluate your 401(k) and make recommendations about your retirement saving and investment choices. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Retirement is a long way off for most people and it can be puzzling to try to figure out how much you will have saved by then. SmartAsset’s 401(k) calculator helps you determine the future value of your 401(k) based on your current balance, annual contribution, employer matches and other factors.
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