Understanding Your Role as a 401(k) Plan Sponsor: Am I a Fiduciary?

By J. Saunders Wiggins, CFP®, AIF®

J. Saunders Wiggins, CFP®, AIF®

J. Saunders Wiggins, CFP®, AIF® CEO/President

Retirement planning has become top of mind for many Americans in today’s economy. Fortunately, most businesses now offer 401(k) plans to attract new talent and compensate existing employees, helping them plan for their financial futures beyond their working years.

While a 401(k) plan is often a key piece of your employees’ compensation plan, it impacts your tax-planning picture and brings significant legal and financial responsibilities.

Who is Responsible for the Plan?

An often-overlooked question is “who is in charge of the plan?” Perhaps you have not given much thought to this. However, if your practice offers a 401(k) plan, you have a fiduciary obligation to ensure the plan is managed prudently.

How do I Know if I am a Fiduciary?

You are a fiduciary if you:

  • Have discretion or responsibility in the administration of the plan;
  • Exercise discretion or control over plan assets;
  • Render investment advice to the plan for a fee or have any authority or responsibility to do so.

What are my Fiduciary Responsibilities?

As a fiduciary, it is key that you understand your roles and responsibilities. There are five basic principles of fiduciary duty: prudence, loyalty, exclusive purpose, diversification, and adherence.

  • The duty to act prudently is a central responsibility of a fiduciary’s role under ERISA (Employee Retirement Income Security Act).
  • Fiduciaries are expected to act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them.
  • Diversifying plan investments and paying reasonable plan expenses is key.
  • Finally, it is important that fiduciaries understand and follow the plan documents.

As a fiduciary, you are responsible for creating and maintaining a documented, prudent process to select, monitor and update investments that are appropriate for the plan. If you fail to do this, you will likely have personal liability for losses due to a breach of your fiduciary responsibilities. As a fiduciary, you are expected to have the level of knowledge of an experienced 401(k) professional.

Do I Have Options to Decrease my Personal Liability?

If you are not comfortable with this personal liability, you can reduce it by selecting a professional to take care of this for you. Under ERISA, you may delegate certain duties related to the selection, monitoring and updating plan investments to an investment advisor. If you choose this route, it is important that the advisor accept their fiduciary status in writing. Working with an advisor helps ease the strain of personal responsibility for your practice’s 401(k) plan offerings.

It is important to understand and distinguish whether the advisor is a 3(21) or 3(38) advisor. A 3(21) investment advisor makes recommendations to the plan sponsor. The plan sponsor still has the responsibility of making the final decision. A 3(38) investment advisor further minimizes your liability by taking on the discretion and authority to make the final decisions regarding the fund lineup for you.

Remember that hiring and monitoring an investment adviser is a fiduciary act, so make sure you select a professional who you trust and has experience with plan design for dental practices.

Forging a partnership with a proactive and knowledgeable plan adviser can ease the burden of fiduciary liability. With the many responsibilities that come with your role, it can be a considerable relief to lean on a financial advisor. Choosing a partner with integrity and experience can save you hours in work and help you achieve your unique goals.

ACG Wealth Management can offer you support and guidance to plan sponsors looking to understand their roles and responsibilities. Schedule a call with us to speak to an experience and trusted advisor.

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— Topics: 401(k), Financial Planning, Third Party Administration, fiduciary obligation, defined benefit funding