401(k) plans are a popular and convenient way for employees to save for retirement. These plans allow workers to contribute a portion of their salary into a tax-advantaged investment account, with the option to choose from a range of investment options. With this flexibility and convenience comes a certain level of responsibility, however, particularly for those individuals who act as fiduciaries for the plan.
A fiduciary is a person who has a legal obligation to act in the best interests of plan participants and beneficiaries. This includes a variety of people in different roles. In the context of 401(k) plans, fiduciaries include plan sponsors (typically, the employer), plan administrators, and investment advisors. Each of these individuals must put the interests of plan participants ahead of their own and must exercise their duties with the care, skill, prudence, and diligence that a prudent person would use. While it is not a requirement to use the services of a plan administrator or plan advisor, it is almost always in the employer’s best interest to do so. Ultimately, the plan sponsor is responsible for the successful compliance of the plan, and hiring out those services allows the employer to shift most (but not all) of the fiduciary duties to professionals who are skilled at this work, and willing to assume many of these crucial functions for you.
In this article, we will discuss the key responsibilities of 401(k) plan fiduciaries, including the duty to act prudently, the duty to diversify plan investments, the duty to monitor plan investments, and the duty to provide information to plan participants.
Duty to Act Prudently
One of the most important responsibilities of 401(k) plan fiduciaries is to act prudently when making decisions related to the plan. This means that they must exercise the same level of care, skill, prudence, and diligence that a “prudent person” would use in similar circumstances. For example, a prudent person would research and compare different investment options (and vendors), consider the risks and benefits of each option, and make an informed decision. In the same vein, plan fiduciaries must research and compare different investment options, vendors, and even the types of plans themselves, and make an informed decision that is in the best interests of plan participants.
In addition to acting prudently, 401(k) plan fiduciaries must also be impartial and act solely in the interest of plan participants. They cannot use their position as fiduciaries to further their own interests, such as by investing in a company in which they have a financial interest or arranging the plan to suit their needs ahead of the other participants. Doing so could result in a conflict of interest that would compromise the fiduciary’s ability to act in the best interests of plan participants.
Duty to Diversify Plan Investments
Another important responsibility of 401(k) plan fiduciaries is to diversify plan investments. This means that they must invest the plan’s assets in a way that minimizes the risk of large losses, while also ensuring that the plan’s investments are well-diversified across different asset classes. For example, a well-diversified 401(k) plan might include investments in stocks and bonds, eal estate.
Diversifying plan investments is important because it helps to reduce the risk of large losses in the event that one particular asset class performs poorly. This, in turn, helps to ensure that plan participants have a more stable and secure retirement.
Duty to Monitor Plan Investments & Custodians
In addition to acting prudently and diversifying plan investments, 401(k) plan fiduciaries also have a duty to monitor plan investments. This means that they must periodically review the plan’s investments to ensure that they are still in line with the plan’s investment objectives and that they continue to be in the best interests of plan participants.
This duty to monitor plan investments also includes the responsibility to remove underperforming investments and replace them with more suitable options. For example, if a particular investment has underperformed for an extended period of time, the fiduciary might consider removing it from the plan and replacing it with a more suitable option.
They must also do a periodic review of the plan itself, including all components of the plan such as the custodian or vendor and their underlying services, costs and changes to their own public disclosures. Do you know, for instance, if your 401(k) custodian has recently had a lawsuit or a regulatory event? Acting as your participants’ fiduciary to perform due diligence on the custodian of their retirement assets is a crucial function many employers many not feel qualified to do. A fiduciary plan advisor does this work on your behalf.
Duty to Provide Information to Plan Participants
Finally, 401(k) plan fiduciaries must provide regular, accurate and timely information and disclosures to both plan participants and regulating government agencies on a recurring basis. Again, this is a function that plan sponsors can undertake on their own if they have the trained personnel to do so, but it is often best left to a plan advisor and administrator to ensure compliance with the various (and changing) laws and regulations.
Plan sponsors are also expected to provide their participants with educational opportunities to learn more about money management concepts and investing basics. This is most often performed by a plan advisor, and for good reason: the more a company involves itself in the financial lives of their employees, the more fiduciary responsibilities they legally assume.
The best solution for 401(k) plan governance is a professional partnership with a fiduciary plan advisor
Many employers, eager to provide a retirement plan as part of their benefits package to attract and retain their talented teams, find that working closely with a trusted team of experts to create, review, implement and administer the company’s 401(k) plan is not only a matter of efficiency, it’s often a matter of lowered civil and legal liability that makes financial sense for the company.
If your company currently has a 401(k) that has not been reviewed in the past 3 or so years, or if you are unhappy with your current plan or plan advisor, or if you’ve never had a 401(k), SEP or SIMPLE IRA, or other retirement plans for your team (and there are a lot to choose from), partnering with an experienced, fully fiduciary, fee-only plan advisor may be in your best interest.
nVest Advisors stands ready to partner with and support your company’s ERISA (and non-ERISA) retirement program. The first step is a due diligence meeting where we can both gather the information we need to make an informed decision on the options you have (and how previous plan choices are working for your company). If your company would benefit from this free fact-finding consultation, please don’t hesitate to reach out to us.
