Plan sponsor

Understanding the role of a 401(k) plan sponsor

A 401(k) plan sponsor is typically the business entity whose employees are covered by the 401(k) plan. The sponsor's primary role is to establish the retirement plan for the company and its employees. The same principles generally apply to other defined contribution plans, such as 403(b) plans. 

Responsibilities and roles of a 401(k) plan sponsor

The plan sponsor is responsible for creating and maintaining the 401(k) plan. This includes deciding to start, design, amend, or terminate the plan. These actions are often referred to as "settlor functions" and are not fiduciary in nature, meaning the sponsor makes these decisions solely in an employer capacity.

Understanding the fiduciary duties of a 401(k) plan sponsor

While some decisions made by the plan sponsor are business decisions, they often assume fiduciary responsibilities. By default, the plan sponsor may also serve as the ERISA 3(16) Plan Administrator and the Named Fiduciary, which require fiduciary duties such as acting prudently, diversifying investments, managing plan expenses, and avoiding conflicts of interest.

Delegating responsibilities

If the plan sponsor does not want to assume direct fiduciary responsibilities, or does not have the knowledge to properly carry out the responsibilities, they may be able to delegate these roles to other entities or individuals. This is commonly done by appointing a retirement plan committee or hiring external service providers. However, the fiduciary must monitor the third party for prudence and ensure they are properly administering the plan according to the document.

The significance of a 401(k) plan sponsor

The plan sponsor plays a crucial role in the overall management and administration of the 401(k) plan. They are essential in ensuring the plan complies with relevant laws and regulations, and their decisions impact the structure and benefits of the plan offered to employees.

Other key roles in 401(k) plan management

Plan administrator: Overseeing daily operations

The plan sponsor interacts with various other roles involved in plan management, such as the plan administrator, who is responsible for the day-to-day administration of the plan.

Named Fiduciary: Ultimate authority on fiduciary decisions

The Named Fiduciary holds the ultimate authority over fiduciary decisions, ensuring all actions are in the best interests of plan participants.

Trustee: Managing plan assets

The trustee ensures plan assets are managed in the best interests of participants. The plan sponsor may also work with external service providers, such as recordkeepers or third-party administrators (TPAs), to manage specific tasks related to plan administration.

Ensuring compliance and effective management

The plan sponsor plays a foundational role in establishing and managing a 401(k) plan, ensuring it meets employee needs and complies with regulatory requirements. Understanding the nuances of these responsibilities is crucial for the plan's successful operation.