401(k) plan administrator and sponsor duties

There’s no way around it. Retirement plans must follow a complex set of laws and regulations. And to remain in compliance, employers must balance their aspirations of providing retirement savings opportunities with the heavy lifting involved in sponsoring and administering a 401(k).

Ever ask yourself, “How can my company find that balance?” It may help to review the players involved in sponsoring and administering a 401(k). We’ll outline the who’s who behind 401(k) plan administration. And we’ll review how various service providers can help carry the load.

Get started with a Human Interest 401(k) today!

What is an ERISA fiduciary?

Before we identify a plan’s fiduciaries, we must first explain what it means to be an ERISA fiduciary. The Employee Retirement Income Security Act (ERISA) is the federal law that controls most aspects of retirement plans (along with the Internal Revenue Code).

ERISA includes a set of standards (or “duties”), often referred to as “ERISA fiduciary duties.” The primary ERISA fiduciary duty is to run the plan solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits and paying plan expenses.

This deceptively simple sentence breaks out into many parts and means plan fiduciaries must: 

1. Act prudently 

2. Diversify the plan's investments to minimize the risk of large losses 

3. Follow the terms of plan documents

4. Manage plan expenses

5. Avoid conflicts of interest

When acting in a fiduciary role, plan fiduciaries cannot put their own interests above their plan participants and must always consider what’s best for the plan’s participants. ERISA has specific rules that identify who’s wearing a “fiduciary hat” and when they are wearing it.

401(k) plan sponsor vs plan administrator: What’s the difference?

From a high level, the sponsor of a 401(k) plan is the entity that establishes retirement plans for a company and its employees. Normally, the 401(k) plan sponsor is the employer itself, a union, or a selected employee of the firm. ERISA also requires the plan sponsor to select an administrator. A 401(k) plan administrator is the entity that oversees the operation of the plan. Unless otherwise named, plan sponsors also serve as the plan administrator (and may also be the plan’s Named Fiduciary). 

Plan sponsors and plan administrators are often the same entity. But there are some stark differences between their responsibilities. While many decisions made by plan sponsors are not fiduciary in nature, plan administrators are responsible for assuming fiduciary duties, as many tasks require specialized knowledge of retirement plan rules and the use of complex recordkeeping systems.

The four required players for defined contribution plan administration

Every 401(k) plan needs a plan sponsor, a plan administrator, a Named Fiduciary, and a trustee. To review, a plan sponsor, by default, may serve as the 3(16) Plan Administrator, Named Fiduciary, and trustee. That’s why it’s important to understand both the overlaps and differences in the responsibilities of the required players. 

1. The plan sponsor

• Who: The plan sponsor of a qualified retirement plan, such as a 401(k) plan, is typically the business entity whose employees are covered by the plan. In a controlled group, the plan sponsor will be one of the related entities participating in the plan. In a multiple employer plan (MEP), one of the unrelated entities will serve as the plan sponsor, as is the case with PEO plans. If your employees participate in a 401(k) plan, you should determine if you, or some other entity, is the plan sponsor. 

• Plan sponsor responsibilities: Some decisions made by a plan sponsor are considered business decisions and are not fiduciary in nature. Under trust law, the entity that establishes a trust is called the “settlor.” When a plan sponsor acts as an employer or business (i.e., makes business decisions), it’s often said to be making “settlor decisions” or is wearing its “settlor hat.” According to the Department of Labor, decisions to start, design, amend, or terminate a qualified plan are settlor functions. In other words, plan sponsors do not have to focus on the best interests of plan participants when making these decisions. 

Note: It’s critical that plan sponsors understand that, by default, it also serves as the ERISA 3(16) Plan Administrator, and may also be the Named Fiduciary. These roles (as discussed below) require putting on a “fiduciary hat.” If a plan sponsor does not want to play a direct fiduciary role, it should specifically identify someone else—or some other entity—as the ERISA 3(16) Plan Administrator and Named Fiduciary. Most commonly, this delegation of fiduciary responsibility is made to an internal, company retirement plan committee, but it may also be to a service provider.  

2. ERISA 3(16) Plan Administrator

• Who: ERISA Section 3(16) says that a qualified defined contribution plan must have a “plan administrator” (often referred to as the “3(16) Plan Administrator”). Unless another person or entity is identified in the plan document, the 3(16) Plan Administrator is the plan sponsor.

• 3(16) Plan Administrator responsibilities: The 3(16) Plan Administrator is responsible for day-to-day administration decisions for a plan. Some of these duties are ministerial in nature, meaning a set of instructions or procedures are followed to complete the task and no discretionary action is required (e.g., performing nondiscrimination testing or processing employee elective deferral elections). Other duties are fiduciary in nature because they involve discretionary management and control over administration and/or the assets of the plan (e.g., deciding how to correct a plan error or approving a hardship distribution).

The list of tasks involved in managing and administering a plan is lengthy and all fall to the 3(16) Plan Administrator. Many of these tasks require specialized knowledge of retirement plan rules and the use of complex recordkeeping systems. For this reason, it’s common for a 3(16) Plan Administrator to outsource the majority of ministerial tasks to a third party service provider. Sometimes, the plan administrator also outsources some or all of its fiduciary duties to a third party who assumes fiduciary risk (as discussed below). 

3. Named Fiduciary

• Who: Under ERISA Section 402(a), a qualified plan must have a “Named Fiduciary” who has ultimate authority over fiduciary decisions for the plan. The plan’s written document must either specifically identify (or outline a procedure to identify) the Named Fiduciary. In a preapproved plan document, it’s common for the Named Fiduciary to be identified as the same person or entity serving as the 3(16) Plan Administrator (if the plan sponsor is the 3(16) administrator by default, it’s also the Named Fiduciary by default.)

• Named Fiduciary responsibilities: The Named Fiduciary is responsible for selecting, evaluating, and monitoring all other fiduciaries to the plan, as well as any non-fiduciary service providers. By law, this is the fiduciary who plan participants and beneficiaries can turn to for help in determining who’s responsible for each aspect of the plan. The Named Fiduciary can delegate responsibilities to others such as a trustee or investment manager (see below).

4. The trustee

• Who: ERISA Section 403 requires a qualified plan’s assets be held in trust by one or more trustees. Trustees must be named in the trust agreement, in the plan’s written document, or appointed by the Named Fiduciary. The trustee may be an individual employee of the plan sponsor or an outside corporate trustee.

• Trustee responsibilities: Trustees have the primary and exclusive fiduciary responsibility to ensure plan assets are being managed in the best interest of the participants and in line with the plan document. The lift here for the trustee and/or Named Fiduciary can be heavy as it must act as a “prudent expert” when selecting plan investments (meaning it needs to select plan investment using the care, skill, prudence and diligence of a person familiar with the institutional level investments). The good news is that the Named Fiduciary can limit the trustee’s responsibilities by requiring it to act only upon direction. It can also delegate fiduciary responsibility to one or more investment managers.  

Note: Don’t confuse a “custodian” with a trustee. A custodian is often hired by the trustee to hold the plan’s assets and handle the buying and selling of investments. The services of a custodian are documented in a custodial agreement, but the trustee has control over what the custodian does and is generally responsible for its actions. 

Optional support for 401(k) plan administration

Given the scope of work behind 401(k) plan administration—not to mention, the specialized knowledge required—it’s common for plan sponsors and fiduciaries to bring specialists to the conversation. Sometimes, this means building out expertise within the business, such as appointing a retirement plan committee. Other times, it means partnering with outside service providers. 

When hiring a service provider, the plan fiduciary should pay attention to the type of service being provided and the level of fiduciary responsibility the service provider has agreed to take, if any. If a service provider agrees to take fiduciary responsibility for a task or tasks, it’s important to review all service agreements to fully understand any limitations the provider may have.

What is a Retirement Plan Committee?

A plan sponsor is not required to have a retirement plan committee. However, if the plan sponsor appoints a retirement plan committee as the Named Fiduciary, the company’s owner or board of directors (or other authorized representatives) will be relieved of most fiduciary responsibilities. The plan sponsor will step into an “oversight” role, meaning its fiduciary responsibilities are limited to prudently appointing committee members and monitoring overall performance. It’s common for large employers to establish a retirement plan committee to move this fiduciary responsibility to an identified group of employees who can focus more time and attention on plan administration issues.

If a plan sponsor wants to establish a retirement plan committee, it should use a charter, which clearly delegates fiduciary responsibility from the plan sponsor to the committee. At a minimum, the charter should also outline the general responsibilities of the committee members, identify how members will be selected and replaced, and how and when the committee will report back to the plan sponsor. The committee should keep written records that document the prudent process used by members when making all fiduciary decisions for the plan.

Delegating fiduciary responsibility to a 3(38) Investment Manager

A plan may delegate fiduciary responsibility for plan investments from the plan’s trustee or Named Fiduciary to an ERISA 3(38) investment manager. A 3(38) Investment Manager is a registered investment adviser, bank, or insurance company that meets certain qualification standards and has acknowledged in writing that it is a fiduciary to the plan.

Once a 3(38) investment manager is appointed in writing, it has the power to manage, acquire, or dispose of any plan asset. This means the 3(38) investment manager assumes sole fiduciary responsibility for investment selection and monitoring, relieving the trustee and Named Fiduciary of almost all fiduciary responsibility for investments. The trustee and/or Named Fiduciary is still responsible for oversight, meaning prudently selecting and monitoring the 3(38) investment manager, taking into account its qualifications, and other relevant factors. 

Plan sponsors who do not want to play an active role in selecting plan investments, either from a risk tolerance perspective or due to a lack of experience, are often advised to hire a 3(38) investment manager.

Sharing fiduciary responsibility with a 3(21) Investment Advisor

ERISA 3(21) also defines who’s a plan fiduciary. Specifically, §3(21)(A)(ii) says that a person or entity that “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan” is a fiduciary to the plan. The 3(21) investment advisor uses its skill and prudence in institutional investing to make recommendations to the plan’s trustee or Named Fiduciary, who then makes the final investment selections for the plan. 

Essentially, a 3(21) is a helper, not a decision maker, and is considered a co-fiduciary with the trustee or Named Fiduciary. This type of relationship works best for a plan sponsor that still wants final authority over choosing the plan’s investment lineup. Ultimately, it's important for plan sponsors to understand who’s responsible for selecting a 401(k) plan’s investment line up—and to choose an investment service provider that best matches the sponsor’s goals. 

Recordkeepers (plan administrator, TPA, etc.)

The 3(16) Plan Administrator is responsible for both day-to-day ministerial tasks and fiduciary decisions involved in keeping a plan running smoothly. Most plan sponsors don’t hire a staff of employees to act as 401(k) plan specialists. Instead, most will outsource almost all ministerial functions to a service provider that go by a variety of names, such as recordkeeper, plan administrator, or third party administrator (TPA).

Some ministerial tasks related to 401(k) plan administration include: 

• Performing annual compliance testing (including nondiscrimination testing)

• Processing contributions, loan payments, distributions, salary deferral changes, and investment election changes

• Monitoring eligibility and vesting

• Providing required notices and benefit statements

However, the list could go on. A recordkeeper can perform all of these tasks, and more, by following a set of procedures. However, a recordkeeper that has not accepted fiduciary responsibility (as discussed below) does not—and should not—make any discretionary decisions when completing these tasks. If the recordkeeper discovers an issue that requires a discretionary decision, it should consult the 3(16) Plan Administrator for direction. 

For example, a recordkeeper may find a group of eligible employees were not enrolled under the plan’s auto enrollment feature. This is an operational error. Deciding how to correct an operational error requires discretion, and is a fiduciary decision that belongs to the 3(16) Plan Administrator. In some cases, the next step will appear obvious to all parties—but the recordkeeper should still seek direction before acting. Don’t be fooled by titles! The 3(16) Plan Administrator retains all fiduciary decision-making authority in this type of recordkeeper arrangement, even if the service provider calls itself a “plan administrator.” 

Recordkeeper with fiduciary responsibility (“3(16) services provider”)

In addition to handling ministerial tasks, some recordkeepers are also willing to handle some fiduciary-level responsibilities. These are typically recordkeepers or TPAs who sell “3(16) services” for an additional fee (related to the additional risk exposure they’re willing to take for the plan). These services can be attractive, especially to smaller employers, who lack the staff to keep up with signing distribution forms and other discretionary issues. 

Most service providers who offer 3(16) services don’t step fully into the role of 3(16) Plan Administrator. Instead, they have a list of specific services for which they’ll make fiduciary decisions or take fiduciary responsibility. Some tasks a 3(16) service provider may agree to take over in a fiduciary capacity include: 

• Taking responsibility for preparing and signing a plan’s annual Form 5500 

• Ensuring loans meet IRS guidelines

• Approving a 401(k) hardship withdrawal 

• Authorizing distributions 

• Securing a fidelity bond 

The list of 3(16) services a service provider is willing to provide is unique to each provider. Plan sponsors should fully review and understand exactly what fiduciary responsibilities the provider will—or will not—take on. It's a good idea to check the service agreement to look for limitations on the services, fees for services in excess of those limitations, and any excluded services.

Who’s on your team for 401(k) plan administration?

While keeping track of the who’s who’s behind 401(k) plan administration may be overwhelming, know that you don’t have to do it alone. Still unsure about who and what you need to set up a 401(k) plan? Need new players for the 401(k) plan team you already have? Get in touch with a Human Interest retirement specialist today.

* Applies to all transaction types. For non-rollover distributions, shipping and handling fees may apply to requests for check issuance and delivery.