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Meeting Your 401(k) Fiduciary Responsibilities

To help your business avoid any pitfalls, this guide outlines your 401(k) fiduciary responsibilities.

By Betterment Editors

Published Sep. 09, 2022 | Updated Sep. 06, 2023

Meeting Your 401(k) Fiduciary Responsibilities Sep 6, 2023 4:30:00 PM To help your business avoid any pitfalls, this guide outlines your 401(k) fiduciary responsibilities. If your company has or is considering starting a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does being a fiduciary mean to you as a 401(k) plan sponsor? Simply put, it means that you’re obligated to act in the best interests of your 401(k) plan, its participants and beneficiaries. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face legal and financial ramifications. To help you avoid any pitfalls, this guide outlines ways to understand your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act with care and prudence and not engage in any conflicts of interest with regard to plan assets. When you adopt a 401(k) plan for your employees as a plan sponsor, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties, and may even shoulder some of the responsibility for you as we’ll explain below. Key fiduciary responsibilities No matter the size of your company or 401(k) plan, every plan sponsor has fiduciary duties, broadly categorized as follows: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. As a fiduciary, you must follow the high standards of conduct required by ERISA when managing your plan’s investments and when making decisions about plan operations. There are five cornerstone rules you must follow: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, which include reviewing fees on an ongoing basis, collecting and evaluating fee disclosures for investments and service provider’s revenue, and comparing (or benchmarking) fees to help ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Fees can really chip away at your participants’ account balances (and have a detrimental impact on their futures). So take care to help ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. And if you have an existing 401(k) plan, it’s important to take note of the “ongoing” responsibility to review fees to determine their reasonableness. The industry is continually evolving and what may have been reasonable fees from one provider may no longer be the case! It’s your responsibility as a plan fiduciary to keep an eye on what’s available. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. Additional fiduciary responsibilities On top of the five cornerstone rules listed above, there are a few other things on a fiduciary’s to-do list: Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days. For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to help to guide you through the process. It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as Safe Harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Get help shouldering your fiduciary responsibilities For most employers, day-to-day business responsibilities leave little time for the extensive investment research, analysis, and fee benchmarking that’s required to responsibly manage a 401(k) plan. Because of this, many companies hire outside experts to take on certain fiduciary responsibilities. However, even the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out many of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. Take a look at the chart below to see the different fiduciary roles—and what that would mean for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility (yet still needs to monitor the 3(38) provider) 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibilities Betterment can help Betterment serves as a 3(38) investment manager for all plans that we manage and can serve as a limited 3(16) fiduciary with agreed upon administrative tasks as well. This means less work for you and your staff, so you can focus on your business. Get in touch today if you’re interested in bringing a Betterment 401(k) to your organization: 401k@betterment.com.

If your company has or is considering starting a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does being a fiduciary mean to you as a 401(k) plan sponsor? Simply put, it means that you’re obligated to act in the best interests of your 401(k) plan, its participants and beneficiaries.

It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face legal and financial ramifications. To help you avoid any pitfalls, this guide outlines ways to understand your 401(k) fiduciary responsibilities.

A brief history of the 401(k) plan and fiduciary duties

When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct.

Among other responsibilities, fiduciaries must always act with care and prudence and not engage in any conflicts of interest with regard to plan assets. When you adopt a 401(k) plan for your employees as a plan sponsor, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code.

The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties, and may even shoulder some of the responsibility for you as we’ll explain below.

Key fiduciary responsibilities

No matter the size of your company or 401(k) plan, every plan sponsor has fiduciary duties, broadly categorized as follows:

You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments.
You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated.

As a fiduciary, you must follow the high standards of conduct required by ERISA when managing your plan’s investments and when making decisions about plan operations. There are five cornerstone rules you must follow:

Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries.
Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers.
Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets.
Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA).
Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, which include reviewing fees on an ongoing basis, collecting and evaluating fee disclosures for investments and service provider’s revenue, and comparing (or benchmarking) fees to help ensure they are reasonable.

You don’t have to pay a lot to get a quality 401(k) plan

Fees can really chip away at your participants’ account balances (and have a detrimental impact on their futures). So take care to help ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans.

And if you have an existing 401(k) plan, it’s important to take note of the “ongoing” responsibility to review fees to determine their reasonableness. The industry is continually evolving and what may have been reasonable fees from one provider may no longer be the case! It’s your responsibility as a plan fiduciary to keep an eye on what’s available.

Why it’s important to fulfill your fiduciary duties

Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue.

Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to:

Restore plan losses (including interest)
Pay expenses relating to correction of inappropriate actions.

While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment.

Additional fiduciary responsibilities

On top of the five cornerstone rules listed above, there are a few other things on a fiduciary’s to-do list:

Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size:
1. Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages.
2. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days. For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then.
Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to help to guide you through the process. It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as Safe Harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits.

Get help shouldering your fiduciary responsibilities

For most employers, day-to-day business responsibilities leave little time for the extensive investment research, analysis, and fee benchmarking that’s required to responsibly manage a 401(k) plan. Because of this, many companies hire outside experts to take on certain fiduciary responsibilities. However, even the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out many of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary.

Take a look at the chart below to see the different fiduciary roles—and what that would mean for you as the employer:

Defined in ERISA section	Outside expert	Employer
No Fiduciary Status	Disclaims any fiduciary investment responsibility	Retains sole fiduciary responsibility and liability
3(21)	Shares fiduciary investment responsibility in the form of investment recommendations	Retains responsibility for final investment discretion
3(38)	Assumes full discretionary authority for assets and investments	Relieves employer of investment fiduciary responsibility (yet still needs to monitor the 3(38) provider)
3(16)	Has discretionary responsibility for certain administrative aspects of the plan	Relieves employer of certain plan administration responsibilities

Betterment can help

Betterment serves as a 3(38) investment manager for all plans that we manage and can serve as a limited 3(16) fiduciary with agreed upon administrative tasks as well. This means less work for you and your staff, so you can focus on your business. Get in touch today if you’re interested in bringing a Betterment 401(k) to your organization: 401k@betterment.com.