401(k) fiduciary roles

401(k) plans can be complex due to the number of service providers required to make a plan run smoothly. This typically includes your record-keeper, TPA, Custodian, Advisor, Broker, Auditor, and Plan Fiduciaries. We had a few clients request a breakdown more specifically on plan fiduciaries and their roles. So here we have outlined the major fiduciary roles in a 401(k) plan and also provided some additional links for further reading.

What is a fiduciary?

ERISA defines a fiduciary on a retirement plan as someone who has some level control over the plan's operations, assets, or investments as whole. Plan fiduciaries have a legal obligation to act in the sole interest of plan participants and consequently carry the majority of the legal risk should something go wrong on a plan.

What are the specific fiduciary roles with a 401(k) plan?

3(21) Named Fiduciary

The 3(21) Named Fiduciary is occasionally referred to as "The Mother of All Fiduciaries".  The sponsoring employer almost always carries this role along with the role of Trustee. Their primary role is to select, monitor, and benchmark all of the other fiduciaries and service providers on the plan.  Essentially, the buck stops here when it comes to legal risk.  Even if another fiduciary makes a mistake, the 3(21) typically carries some of that risk as they oversee it all.  This is why most employers end up footing the bill when it comes to fines, fees, or penalties related to audits or 401(k) lawsuits. This is different than the role of financial advisor under section 3(21) which is explained in more detail below.

3(16) Plan Administrator

The 3(16) Plan Administrator is sometimes referred to as "The Great Communicator" or "The Workhorse" because this fiduciary manages the day to day operations on the plan.  They are responsible for plan communication to employees and to the DOL, IRS, or other regulatory bodies on the plan's behalf. Other duties include reviewing and signing the 5500, participant education, approving loans and distributions, procuring a fidelity bond, retaining an auditor or attorney, managing plan audits, managing force-outs, and much more.  They have by far, the longest list of administrative duties and as a result, typically have the largest room for error.  If they are signing the 5500, they are the 3(16) Plan Administrator.

 3(38) Investment Manager

No nickname needed for the 3(38) Investment Manager because their title says it all. They manage the plan's investments, or at very least the fund lineup.  They are responsible for selecting, managing, monitoring, and benchmarking the investments in the sole interest of participants. Their tasks also include creating and managing an investment policy statement ("IPS"), forming an investment committee, holding committee meetings, and replacing investments per the IPS. By default, this role is typically filled by the employer which can certainly present some issues depending on their level of investment expertise. For most companies, that is not a natural fit.  This role also carries a significant amount of fiduciary risk as fund share classes, investment fees, and indirect compensation are often a target of 401(k) lawsuits.

Other fiduciary roles 

There are two other fiduciary roles worth discussing that are not always named in a plan document. The first, is the 403(a) trustee. A trustee is required on a 401(k) plan, but may not always be named in the plan document. When not named, the Trustee is often the business owner, CEO, or CFO. In some cases, however, the role of Trustee is delegated to a trust company who is holding and moving assets as directed by the 3(21) Named Fiduciary.  This is known as "Directed Trustee" as opposed to a "Discretionary Trustee". Other than a participant and the 3(38) investment manager, the Trustee is the only other party that has a level of control over the funds.  If you'd like to learn more about the role of Trustee, here is a good article.

The other role worth discussing is that of a 3(21) financial advisor. Under section 3(21) of ERISA, financial advisors who give investment advice on a 401(k) plan have typically been limited-scope fiduciaries subject to a suitability standard.  However, with new proposed regulations, many advisors may be required to enter into a contractual obligation with the plan sponsor naming themselves as fiduciaries required to act in the "best" or "sole" interest of plan participants. 

Who are my plan fiduciaries?

On a typical 401(k) plan, the plan sponsor or employer usually signs and acts in nearly all of these fiduciary roles and carries the majority of associated legal risk. Occasionally we will find a plan who is sharing or outsourcing a portion of those roles with an advisory firm, but rarely do we see plans take advantage of outsourcing risk and work for the bulk of the fiduciary responsibilities to experts.

This article was produced in collaboration with HealthEquity Retirement Services, LLC. HealthEquity Retirement Services, LLC is a wholly owned subsidiary of HealthEquity, Inc. Nothing in this communication is intended as legal, tax, nancial or medical advice.