Facts about 401(k) Plan Sponsors

401(k) Plan Sponsors – What You Need To Know

The vast majority of employers are dangerously unaware of their responsibilities and the liability associated with serving as their company’s 401(k) plan sponsor. Here are the facts you need to know.

The company (you) is the plan sponsor, not the 401(k) service provider, i.e.: Fidelity, Principal Insurance, John Hancock, Paychex

As the plan sponsor, the company (you) is the named plan Fiduciary. In most cases, a company’s administrative committee members or HR department personnel have discretion over the selection, administration, or management of the plan’s service provider(s) making the plan sponsor employee(s) fiduciaries. The service provider is NOT the fiduciary.

The Employee Retirement Income Securities Act (ERISA) holds plan fiduciaries to a high legal standard … the responsibilities of fiduciaries have been described as “the highest known to the law.” [Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cit. 1982)]. Consequently, plan sponsors have a solemn responsibility to protect the interests of the workers and retirees in their benefit plans. With this responsibility comes liability.

ERISA imposes personal liability on fiduciaries that breach, knowingly or unknowingly, their duties. In the Worldcom settlement, the CEO, CFO, and HR Director were held personally liable by the courts. In the Enron case, named fiduciaries contributed to the settlement from their personal assets. In both cases the courts ruled that the plan service providers were NOT fiduciaries.

Identifying who’s a fiduciary isn’t always easy. A fiduciary is committed 100% of the time to his client’s best interests. In the financial-services world, there are three job titles that automatically connote a fiduciary standard:


Certified public accountant (CPA)

Registered investment advisor (RIA)

Fiduciary responsibilities are subject to such high standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

Carrying out their duties prudently;

Following the plan documents (unless inconsistent with ERISA);

Diversifying plan investments; and

Paying only reasonable plan expenses.

Broker-dealers and insurance companies are not fiduciaries. A broker-dealer and its registered representatives follow the “suitability” standard (rather than the fiduciary standard). This standard doesn’t require a broker-dealer or insurance agent to place the interests of its clients ahead of its own. In fact state insurance laws make no mention of any kind of fiduciary standard.

The term “co-fiduciary” is a marketing term. Nowhere in the text of ERISA is there mention of “co-fiduciary”. The term, then, has no legal significance at all. As such, it has no applicability to actually providing legal protection to plan sponsors.

ERISA permits plan sponsors, and in fact requires them, to get help when they need to in the form of an investment manager. ERISA Section 402(c)(3) expressly authorizes named fiduciaries such as the plan sponsor to appoint investment manager(s) known as independent fiduciaries

Without exception, an independent fiduciary:

Does not receive commissions, referral fees or other financial incentives that could influence their recommendations.

Is willing to disclose any relationship, compensation, incentive or other factors or fees that potentially could interfere with their ability to act in a client’s best interests.

Broker-dealers and insurance companies are compensated via commissions and other financial incentives. A fee-based Registered Investment Advisor is not.

The only way for a plan sponsor to be absolutely certain that it has delegated the responsibilities and transferred all of the allowable liability in accordance with ERISA Section 402(c)(3) is to engage an investment manager that will acknowledge in writing, in the fiduciary – investment manager contract, its status as an ERISA section 3(38)-defined “investment manager” and ERISA section 405(d)(1) defined “independent fiduciary.”

Want more facts about 401(k) plan sponsors responsibilities? Contact the professionals at Triton Financial.

Financial Focus

Bob Gustafson, Triton Financial Group

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