Broker Check

Primer on Being a Responsible Retirement Plan Sponsor

January 17, 2024

Creating a Tax Asset

If you are a business owner or human resources leader, you are likely playing a role as retirement plan sponsor for your company.   The challenge, though, is that this role is not your primary role and it is likely not the first thing you think about each morning as you commute (or connect digitally) to the office.  The opportunity on the other side of the challenge is to ensure your retirement plan is serving it’s primary purpose, which is to attract great team members and help them prepare financially for their future.   The great news is this:  you can cost effectively assemble a great team to delegate the majority of the heavy lifting.  

This article will update or remind you of the key responsibilities and roles that go into delivering a retirement plan to your employees. 

As a retirement plan sponsor, you have an important role in ensuring that your employees are able to save for their future. As a fiduciary, you have a legal and ethical obligation to act in the best interests of your plan participants. This article will provide an overview of your fiduciary responsibilities and key ways to discharge them. It will also distinguish the differences between the roles of advisor, third-party administrator, and recordkeeper.

Fiduciary Responsibilities

As a plan sponsor, you are considered a fiduciary under the Employee Retirement Income Security Act (ERISA). This means that you have a legal obligation to act in the best interests of your plan participants, and to manage the plan prudently and solely for their benefit. This includes:

  1. Duty of Loyalty: You must act solely in the interest of the plan participants and beneficiaries, putting their interests ahead of your own or any other party.
  2. Duty of Care: You must act with the same care, skill, and diligence that a prudent person would use in similar circumstances.
  3. Duty to Diversify: You must diversify the plan’s investments to minimize the risk of large losses.
  4. Duty to Monitor: You must monitor the plan’s investments and service providers, and make changes as necessary.

Discharging Fiduciary Responsibilities

To discharge your fiduciary responsibilities, there are several key actions you can take:

  1. Create an Investment Policy Statement (IPS): An IPS is a written document that outlines the plan’s investment objectives, strategies, and guidelines. It provides a framework for making investment decisions and ensures that those decisions are consistent with the plan’s objectives.
  2. Conduct a Periodic Review: You should periodically review the plan’s investments and service providers to ensure that they continue to meet the plan’s objectives and that fees are reasonable.
  3. Document Your Decisions: You should keep a record of all decisions and actions taken as a fiduciary. This documentation will help to demonstrate that you acted prudently and in the best interests of the plan participants.

Roles of Advisor, Third-Party Administrator, and Recordkeeper

While the plan sponsor is ultimately responsible for the plan’s operations and administration, there are several key service providers that can assist with these tasks:

  1. Advisor: An advisor is a professional who provides investment advice to the plan sponsor and/or plan participants. They can help to create an IPS, select and monitor investments, and provide education to participants.
  2. Third-Party Administrator (TPA): A TPA is a company that provides administrative services to the plan, such as recordkeeping, compliance testing, and preparing Form 5500.
  3. Recordkeeper: A recordkeeper is responsible for maintaining the plan’s records, such as participant account balances, contributions, and distributions.

Benchmarking a 401(k) plan involves comparing the plan’s features, investment options, fees, and performance to other similar plans in the industry. The goal of benchmarking is to evaluate whether the plan is competitive and meeting the needs of the participants.

Here are the steps involved in benchmarking a 401(k) plan:

  1. Gather information: Collect all the necessary information about the plan, including the plan documents, investment options, fees, and performance data.
  2. Identify comparable plans: Identify similar plans in terms of size, industry, and demographics.
  3. Analyze plan features: Compare the plan’s features such as contribution limits, vesting schedules, eligibility requirements, and matching contributions to similar plans.
  4. Evaluate investment options: Evaluate the investment options offered by the plan in terms of diversity, quality, and performance. Compare the options to those offered by similar plans.
  5. Review fees: Review the fees charged by the plan, including investment fees, administrative fees, and transaction fees. Compare the fees to those charged by similar plans.
  6. Assess plan performance: Evaluate the plan’s performance over time and compare it to industry benchmarks. This will help determine if the plan is performing well or if improvements need to be made.
  7. Make recommendations: Based on the analysis, make recommendations for changes to the plan, such as adding or removing investment options, adjusting fees, or making changes to plan features.

Overall, benchmarking a 401(k) plan is an important part of ensuring that the plan is competitive and meeting the needs of its participants. It can help plan sponsors identify areas for improvement and make informed decisions about the plan’s design and management.

There is no set frequency for benchmarking a 401(k) plan, but it is generally recommended to review and benchmark the plan on a regular basis. Many plan sponsors choose to benchmark their plan every 3-5 years, but some may choose to do it more frequently, especially if there have been significant changes in the industry, plan design, or participant demographics.

It is also important to note that benchmarking should not be a one-time event but rather an ongoing process. This is because the industry, investment options, fees, and participant needs can change over time. Regular benchmarking can help ensure that the plan remains competitive and aligned with participant needs.

In addition to periodic benchmarking, it is a good practice to review the plan’s performance and fees on an ongoing basis. This can help identify issues and opportunities for improvement that may need to be addressed between benchmarking cycles.

Annual Audit

401(k) plans with more than 100 eligible participants at the beginning of the plan year are generally required to have an annual audit. This is mandated by the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Service (IRS).

The audit must be performed by an independent qualified public accountant (IQPA) who is licensed or certified by a state regulatory authority. The IQPA will review the plan’s financial statements and related documents to ensure compliance with ERISA and the Internal Revenue Code.

The audit report must be attached to the plan’s annual Form 5500 filing, which is required by the IRS. The audit report must also be distributed to the plan sponsor and the Department of Labor upon request.

It’s important to note that small 401(k) plans with fewer than 100 eligible participants may be eligible for an exemption from the annual audit requirement. However, they are still required to file an annual Form 5500 and maintain accurate plan records.

In addition to the roles of the advisor, third-party administrator, and recordkeeper, it’s important to understand the differences between a 3(21) fiduciary and a 3(38) fiduciary. These are two types of fiduciaries that can be appointed to assist the plan sponsor in managing the plan’s investments.

  1. 3(21) Fiduciary: A 3(21) fiduciary is an investment advisor who provides advice and recommendations to the plan sponsor. The plan sponsor retains ultimate decision-making authority over the plan’s investments, but the 3(21) fiduciary shares in the fiduciary responsibility for the selection and monitoring of investments. If the plan sponsor fails to follow the 3(21) fiduciary’s recommendations, the 3(21) fiduciary is not held responsible for any losses that may occur.
  2. 3(38) Fiduciary: A 3(38) fiduciary is an investment manager who has full discretion and authority over the plan’s investments. The plan sponsor delegates the fiduciary responsibility for the selection and monitoring of investments to the 3(38) fiduciary. The 3(38) fiduciary is responsible for selecting and monitoring the investments and is held liable for any losses that may occur due to their investment decisions.

It’s important to note that appointing a 3(38) fiduciary does not relieve the plan sponsor of all fiduciary responsibility. The plan sponsor is still responsible for selecting and monitoring the 3(38) fiduciary and ensuring that they are acting in the best interests of the plan participants.

In summary, while a 3(21) fiduciary provides advice and recommendations to the plan sponsor, a 3(38) fiduciary has full discretion and authority over the plan’s investments. Plan sponsors should carefully consider the level of involvement they want in managing the plan’s investments and select the type of fiduciary that best meets their needs.

Our team uses a process to ensure we work closely with each plan sponsor to take care of their role as a plan fiduciary.