The Internal Revenue Service (IRS) defines a fiduciary as a party that owes a duty of care to another party and must act in their best interest because of this. If your company offers a 401(k) retirement savings benefit to employees, the actions required to manage the accounts involve fiduciary responsibilities. This is true whether your organization operates the plan in-house or outsources 401(k) benefit administration to a third party.
Basic 401(k) Fiduciary Responsibilities According to the IRS
The IRS expects fiduciaries to meet a minimum standard of conduct because they hold a position of trust with employees who own the accounts. In addition to always acting in the best interest of account holders and their beneficiaries, fiduciaries must adhere to the following:
- Act with the singular purpose of providing retirement savings benefits to employees who participate in the plan and their beneficiaries.
- Defray reasonable expenses associated with account management.
- Follow all account documents.
- Diversify each participant’s plan investments.
- Complete the duties of a fiduciary with the care, diligence, and skill expected of someone with training in the management of retirement accounts.
The IRS uses the prudent person standard when setting regulations for the management of employee 401(k) accounts. A prudent person is one who understands all regulations governing 401(k) management and acts accordingly. Companies that do not have employees trained in these skills or do not have the time to take on these tasks are free to outsource the work or consult with a financial advisor.
Understanding the Different Types of Fiduciaries
The Employee Retirement Income Security Act (ERISA) of 1974 governs employee retirement plans by ensuring fair treatment for both employers and employees. The act assigns several fiduciary roles within an organization to clarify who is responsible for certain actions and decisions.
- Named fiduciary: This person bears overall responsibility for 401(k) plan management, such as choosing others to help facilitate the plan. Other people who help manage the plan bring their questions about administration and operation to the named fiduciary. A common strategy of businesses offering 401(k) options is to make the plan sponsor the named fiduciary. The plan sponsor is typically the business owner.
- Trustee: ERISA specifies that plan sponsors hold employee assets in a trust account in most situations. A trustee manages assets placed in trust. This person’s primary responsibilities include overseeing fees and expenses, investment transactions, financial statements, and the contribution process.
- Investment manager fiduciary: This person has the authority to select, remove, and manage investments contained in the employee benefit plan.
- Investment advisor fiduciary: The person in this role can recommend plan investments but lacks the authority to implement them. Another responsibility is to monitor plan performance and suggest changes. However, the final authority for implementing changes lies with the plan sponsor.
- Plan administrator: The plan administrator handles duties such as approving loan requests and distributions, annual notice distribution, monitoring plan operations and service providers, and hiring and firing service providers.
Fiduciary Responsibilities Come with Potential Liability
Your company may be liable for losses incurred by the retirement plan if it does not follow basic 401(k) fiduciary responsibilities. This can also apply if the plan incurred gains through improper management of investment accounts. Palmetto Payroll offers a way to avoid this liability by entrusting your company’s 401(k) management to our benefits experts. Please contact us today to learn more about the process.
