If you sponsor a retirement plan for your employees (or want to), you are aware of the potential risks your company assumes, because you are being entrusted with your employees’ contributions, and you’re limiting their retirement options, features, benefits, and investment choices to only those you as the employer chooses.
This makes you a financial fiduciary for your plan participants, and with that legal expectation comes regulatory, legal and even civil consequences if you fail to perform several vital tasks in the administration of your plan. For instance: employer-sponsored retirement plans are now commonly the focus of class-action litigation because the plans themselves have become outdated, expensive, and poorly managed, and the long-term investment results for employees are sub-standard.
As a plan sponsor and fiduciary, it is your obligation to make sure your plan remains competitive in terms of features and costs, is meeting the needs of your plan participants, and is being fairly offered and implemented:
- You need to select a plan vendor (custodian) who is (and remains) financially solvent and who has the trading and custody capabilities to meet the investing needs of your employees.
- Your participants should be able to access their plan account information at any time, receive timely statements of account values and transactions, easily and quickly make changes in their investment selections, receive educational opportunities to learn more about their financial concerns (and ways to manage them), and have convenient access to professionals for information or questions.
- Your plan rules for participation must be lawful and fairly implemented. Employees need to be given adequate and frequent opportunities to participate if they are eligible.
- The plan itself should be free of excessive expenses and mitigate any conflicts of interest the custodian may have in offering to hold your 401k plan assets (such as loading your investment options with proprietary funds they own or funds they receive revenue-sharing compensation from).
- Your investment selections should be able to accommodate a variety of investment objectives and risk tolerances, be performing comparably to their peers or appropriate benchmarks, and be competitive in terms of internal trading and management expenses. You should be reviewing and modifying this list of fund options periodically over the life of your retirement plan.
- You also need to have safeguards in place to assume your participants won’t take an active role in their investment management, leaving their accounts too conservatively invested in their early years, or too aggressively invested later on. Your default investment selection should be appropriate to every employee regardless of age and time to retirement.
- Your company needs to keep track of contributions, matches, loans, rollovers, and more to make sure the rules of the plan are fairly implemented and compliant with evolving laws and regulations.
- Your plan should be reviewed on a regular basis for compliance, recordkeeping, conformity to plan objectives, successful implementation, vendor and investment quality, and more. You need to maintain records and do compliance testing and reporting (depending on the type of plan) to prove that your plan was fairly implemented and no employees were unlawfully excluded.
This sounds like a lot of work, and it is. Some companies have the size and talent to manage many of these expectations internally with a benefits department and specially-trained personnel, but most companies do not.
Plus, even if you could perform most of these tasks yourself, should you? For every task you choose to undertake in-house, you add to the fiduciary burden of your company, putting it at greater and greater risk of failing to perform those required duties (and that wasn’t even a complete list).
Most companies who want to implement a workplace retirement plan want it to be easy to administer, meet the needs of their employees, satisfy the requirements of ERISA and other regulations and reasonably protect them from litigation due to unforeseen (but avoidable) lapses in fiduciary responsibilities.
We’ve previously covered the wide range of common workplace retirement plans in an earlier article. Some plans, like a Payroll-deducted IRA, SEP IRA, or SIMPLE IRA, are easy and inexpensive to start, shift much of the investing responsibility to the employee, and have very few obligations for the employer other than withholding employee contributions and making sure they are deposited into the retirement accounts. Others plan types such as a 401(k), 457, or 403(b) have many additional benefits for employees but added burdens for the employer. Most, but not all, of the burdens of the plan sponsor can be shifted away from the company and into the hands of qualified plan professionals: a PLAN ADVISOR, and a PLAN ADMINISTRATOR.
Not every plan type needs a Plan Administrator or Plan Advisor, but if you need or want to hire this help, we highly recommend you hire only those professionals who agree to assume full legal fiduciary responsibilities. The Department of Labor’s ERISA laws have created three levels of fiduciary duty for hired plan professionals, depending on the work and level of responsibility they will take on for your company. We’ll explain each of these below as we explain what each professional does and why you may want to bring one (or both) into your plan’s management:
The Plan Administrator
Plan Administrators (often called Third-Party Administrators) perform a number of tasks to keep the daily operation of the plan flowing smoothly. They maintain records of new hires and terminations, approve employee loans, rollovers, and withdrawals, and often in conjunction with the investment company holding your plan assets, maintain compliant records on the flow of funds, balances, and transactions in the plan that federal regulators may require on an annual basis (and in the event of a plan audit). Fines and penalties for non-compliance with these aspects of a 401k plan can be very costly, and the plan can even be disallowed if it’s not maintained; the plan administrator assumes these duties and responsibilities for the plan sponsor.
Plan Administrators can do their work one of two ways: they can perform the basic tasks and leave the final fiduciary responsibilities with your company (this is cheaper on the plan and probably ideal for very small companies), or they can assume an ERISA-defined fiduciary role as they perform the tasks for you. This level of service is called an ERISA Section 3(16) Fiduciary.
One difference between simple plan administration and hiring a full 3(16) Fiduciary is who signs and personally guarantees the accuracy of the plan review information to the government. If the Plan Administrator is a full 3(16) fiduciary, they will sign it and assume full responsibility if their work is found to be in error. If the Plan Administrator is not acting in a fiduciary capacity for the company, an executive of the company must personally sign and guarantee the accuracy of the reporting.
Every plan’s needs are different, so as a Fiduciary Plan Advisor often tasked with helping to set up or convert a plan, and helping to screen and hire this Administrator, we don’t have a blanket recommendation on whether your company will need a Plan Administrator, a full-fleged 3(16) fiduciary administator, or neither. That decision is a major part of the process of selecting, designing, and implementing a plan.
The Plan Advisor
Where Plan Administrators handle most of the daily tasks of running a retirement plan, the Plan Advisor handles many tasks for both the Plan Sponsor and the Plan Participants.
Reporting directly to the Plan Sponsor, Plan Advisors can be hired at the earliest stages of designing and implementing a plan or brought in to review and revise an existing plan that isn’t working well.
Plan Advisors are the central hub of the workplace plan, acting in a fiduciary capacity for both the employer and the employees. They are financial and investment experts so the employer doesn’t have to be.
At a top level, Plan Advisors work with the employer to set up the governing rules for the plan itself, perform initial and ongoing due diligence reviews of the potential vendors the plan might use, and recommend and coordinate all needed additional services (like a Plan Administrator) if needed. Working with the owner or executive team, Plan Advisors help you make the right choices in terms of plan type, custodian, plan options, and investment selections for your employees.
As your plan takes off, the Plan Advisor is there to work directly with your management team on needed changes and refinements, making sure participants are properly informed and educated on financial matters and assisting them with investment selections and suitability questions.
The Plan Advisor performs and documents the mandated periodic plan reviews, and often acts as a single point of contact between your company and the plan administrator and custodian.
As with the Plan Administrator, there are Plan Advisors who do their work without assuming much of a fiduciary role, and others who expressly assume that function. If the Advisor is going to act for your company in a fiduciary capacity, ERISA has created two different levels for Plan Advisors: the Section 3(21) Plan Advisor, and the Section 3(38) Plan Manager.
These two levels differ in the degree of authority the Plan Advisor will have over making changes to your plan. For purposes of simplicity, it’s easiest to think of a Section 3(21) Plan Fiduciary as someone who performs research and reporting listed above, but the final decisions about changes to the plan’s investment selection, choice of custodian and support, and other plan specifics are always left for the company to execute. In basic terms, a 3(21) advisor can recommend, but they cannot implement. For example, the 3(21) advisor monitors the investment selections your employees have to choose from, and may recommend replacing one fund with another, but you as the plan sponsor will always have to make that approval personally.
A Section 3(38) Plan Fiduciary, on the other hand, has much more responsibility and discretion to do what is necessary for the plan, without having to involve company management for every decision. In this case, think of the 3(38) fiduciary as the plan’s manager more than just its advisor. A 3(38) advisor can not only recommend changes to the plan investments, but they can go ahead and make the changes they deem necessary acting as the plan’s fiduciary manager, without your company’s involvement. For a company that really wants to be hands-off to the implementation of a plan, 3(38) Fiduciaries can make decisions such as who the Plan Administrator and Custodian are, and negotiate on behalf of the company for specific terms when performing due diligence reviews down the road.
Partnering with nVest Advisors as your Plan’s Fiduciary Advisor
At nVest Advisors, we perform Plan Advisor services for nearly every type of workplace retirement account. Whether your company has just one employee or hundreds, we can help you determine which plan type will fit your needs, help you select a custodian and an investment strategy, and work alongside you as a full, legal fiduciary throughout the life of your Plan. You can work with us as either a 3(21) or a 3(38) fiduciary partner, and our experience, commitment to service excellence, and flexibility as a small firm, are ideal for many small businesses and their retirement needs.
If your company is looking to start a plan, or if you currently have one and want a complimentary Plan Audit and a competitive bid for Plan Advisory services, let’s talk. Book your initial Plan Sponsor Q&A meeting today!