What Does a 401(k) Fiduciary Actually Do for Your Plan?

By Mike Murphy, FiduciaryShield — These days it’s hard to find a financial article that does not reference the term “Fiduciary.” This word is often used as a generic catch-all of responsibility. “Ask if they act as a fiduciary” is a common piece of financial advice, but this simple question isn’t quite enough.

In 2017, many employers are seeking a fiduciary for assistance in managing their 401(k).  While it’s helpful to inquire whether the person you are working with is serving in a fiduciary capacity, there are two far more important questions to ask.

Question 1: What Is Your Level of Fiduciary Duty?

A fiduciary is someone who puts another person’s interests ahead of their own, but not all fiduciaries provide the same services. You must be clear about the capacity in which they will be acting.

The four most common Fiduciary capacities on a 401(k) plan are as follows:

  • Fiduciary: This simply means the fiduciary must act in the best interest of the plan participants. The DOL Fiduciary Rule has extended fiduciary responsibility to certain 401(k) plan advisors who were previously not classified as such. These individuals do not have any specific role in the plan.
  • 3(38) Fiduciary: This person or entity acts in a fiduciary role to recommend and oversee the investments of 401(k) plan. Their role is often limited to the investments of the plan.
  • 3(21) Fiduciary: This person or entity acts in a fiduciary role to co-manage and oversee the administration and investments in the 401(k). They may or may not have discretionary authority based upon the subsection of 3(21) they operate under.
  • 3(16) Fiduciary: This person or entity acts in a fiduciary role to manage and oversee the administration and investments in the 401(k). They have discretionary authority on plan decisions. While this role is extremely helpful to the employer, there is the potential for litigation based on a failure to monitor that could be considered “breach of fiduciary responsibility” by the employer.

Question 2: What Areas of Administration are You Responsible for Overseeing?

When evaluating the level of administrative support being provided, ask the following questions:

  • Is the IRS form 5500 prepared and filed for you? Mistakes on the 5500 can trigger audits. Correct preparation and timely filing are vital to your plan.
  • Is employee eligibility tracked for you? This is a time-consuming burden to many employers. Lifting this responsibility from the employer frees up numerous man-hours.
  • Are deposits of payroll deductions and matching contributions tracked and reconciled? Having a system of checks and balances helps prevent these common mistakes. Ongoing tracking allows you to find errors as they occur and makes it much easier to correct. Reconciliation can also be done at the end of the year, but a late deposit may need to be indicated on your 5500 form.
  • Is compliance data compiled for you, or are you responsible for tracking and compiling it? This is another time-consuming responsibility that many employers struggle to meet.
  • Is the loan processing and approval done for you? When a participant wants to take a loan from their 401(k) there are guidelines that must be met, an approval process to be followed, and loan documents to be signed. Employers are frequently uncomfortable managing this process.
  • Are the investments monitored and reports provided? Monitoring investments and holding investment committee meetings is an overwhelming task for many employers. This one of the primary reasons employers choose to employ a fiduciary for their plan.

Don’t be fooled by someone tossing around the word fiduciary. Probe further and find out what fiduciary capacity they act in and what services they provide. Understanding the questions to ask will help ensure that you are receiving the level of service you expect. The more services the fiduciary administers, the more you as an employer can focus on growing your business instead of spending your valuable time administering your 401(k) plan.

Mike Murphy is vice president of ERISA consulting at FiduciaryShield a retirement plan fiduciary administrator and compliance company.

Topics: #401k #Fiduciary #Retirement #401kFiduciary #401kservices