If you’re signing your company’s 401(k) Form 5500 for the Department of Labor, then are you the employee fiduciary to the plan’s participants? What legal liability are you taking on if you are acting as a fiduciary to your company’s employees?
If you offer a 401(k) plan at your company, then your company is the fiduciary to your employees.
The IRS requires every 401(k) plan sponsor to sign and file a form reporting the details of the plan. This form acts much like a personal income tax form (like a 1040) but for the 401(k) plan (the Form 5500). As with all federal documents, it’s an important compliance document, and there are consequences to failing to follow the various IRS and Department of Labor (DOL) regulations.
When businesses hire an outside advisor or 401(k) provider, they often assume that this vendor will handle all of the plan’s administrative and investment responsibilities, including taking on the fiduciary roles. Unfortunately, many vendors are only willing to act as an investment fiduciaries, and will not take on the administrative fiduciary duties.
The three common 401(k) fiduciary classifications are:
- 3(21) Helps you analyze, select, and monitor the investments in your 401(k). Likely gives you recommendations on what investments to offer, but you will ultimately make the decision. If there is an operational error, a helpful 3(21) might share some of their experience, but you’ll ultimately have to decide how to correct the problem.
- 3(38) Determines the investment options for the 401(k) plan for you and makes changes if any of the investments are no longer prudent for your employees. The 3(38) will probably even indemnify you in writing for their investment decisions. But the 3(38) won’t take on formal responsibilities and legal liability for plan administration.
- 3(16) Will provide day-to-day operations of your plan, including things like tracking employee eligibility, maintaining necessary records, providing documentation to participants, reviewing and approving financial reports, performing investment reviews, etc – and takes on the fiduciary role for the plan’s administration.
To delegate the most fiduciary responsibilities and liability for the plan, hire a true employee fiduciary who meets the highest ERISA fiduciary standards – a 401(k) provider who is both a 3(38) AND a 3(16) fiduciary. Don’t settle for anything less!
What are the consequences if you fail as an Employee Fiduciary?
The most common cases that the Department of Labor brings are caused by errors in administering 401(k) plans. In 2013, 73% of investigations that the DOL closed resulted in monetary fines or other corrective action! (Source: BenefitsPro)
So, if you decide to hire someone who only acts as a 3(38) investment fiduciary, you are potentially leaving yourself liable to the most common 401(k) plan error – plan administration problems. You only get this protection by bringing on a 3(16) fiduciary.
Employee Fiduciary Reviews
Let’s review how American businesses and 401(k) providers are doing in their roles as fiduciaries to their employees.
According to John Nichols, employment benefits lawyer with Gray Plan Mooty, “It’s just difficult at times for employers to keep up and attend to all the details. The rules are complex, and the administration of the plans is correspondingly complex.” And, even worse, the financial services company that provides the investment plan has a limited role. “Vendors are pretty good at allocating accounts and providing access to account information,” he said. “That doesn’t mean that the whole job is done. You didn’t get a totally turnkey product. There are things you need to do as well.” (As quoted in BenefitsPro)
If you are going to hire someone who claims to be an employee fiduciary review to make sure that you aren’t actually getting a provider who fails to take on the fiduciary responsibility for the difficult administrative tasks of legally correctly running a 401(k) plan! This is especially true since the administration is error prone, time intensive and the place where the plan sponsor is most likely to have a problem. Review with your provider to understand which fiduciary coverage they are providing.
What responsibilities do retirement plan sponsors have on employee fees?
The DOL publishes guidelines on what it means to be a fiduciary to your company’s retirement plan and to your employees. One of the areas that the DOL wants plan sponsors to understand is fees. The DOL has produced a booklet encouraging employees to understand their plan’s fees, and says, “You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must: Establish a prudent process for selecting investment options and service providers; Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided”.
As a plan sponsor, you therefore have a responsibility to ensure that the fees paid by employee participants in the 401(k) plan are “reasonable.” This means that you should review your provider’s fees and understand them. In a separate booklet written for 401(k) plan sponsors, the Department of Labor says, “Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility.”
Reviewing and comparing 401(k) provider fees
Be wary of traditional 401(k) vendors who claim to be employee fiduciaries and offer “fee comparisons.” These comparisons often leave off important costs associated with running a traditional 401(k) plan! Be sure to ask about the cost of getting a 3(16) fiduciary when reviewing any fee assessment. Understand if the vendor offers payroll integration – and if they don’t, make sure you know how much time and effort that it will cost you to update your employee’s elections. Figure out the liability that you are taking on by being responsible for coordinating payroll and a 401(k) system (the Department of Labor has an online calculator that you can use to help determine the amount that it will cost you if you make mistakes!) Review if the vendor will track employee eligibility and handle employee communications – these costs are hidden costs that can eat into your HR team’s valuable time. Will your vendor handle complicated regulatory monitoring tasks like non-discrimination testing, top heavy testing, etc.?
Technology versus supposed employee fiduciaries
One way you can have low fees and cover fiduciary responsibilities to your employees is through working with a technology forward 401(k) provider like ForUsAll. Technology allows for administrative and investment responsibilities to be handled at scale, versus other 401(k) vendors who may claim to be an employee fiduciary but who only provide a limited amount of fiduciary coverage. If you are working with a vendor who does not use technology to offer automated anti-discrimination testing or top heavy testing, schedule a demo!
Multiple employer plans, or MEPs, are another way that technology can be used to provide lower fees. While ForUsAll offers both MEP and SEP (single employer plan) 401(k) plans, most of our clients choose to do a MEP for the reasons that Obama, Paul Ryan, and Harvard economist Brigitte Madrian all agree on: MEPs make it easier for employers to offer a 401(k) plan by lowering costs and compliance burdens. A multiple employer plan can allow many small businesses to combine their purchasing power and realize economies of scale, lowering fees. This is great for participants and lowers the barrier of entry for employers. ForUsAll uses technology to proactively monitor, identify and remove any “bad apples” from the MEP so that it won’t cause issues for the overall plan. Review any supposed employee fiduciary 401(k) vendors to see if they even monitor the plan at all for things like employee eligibility, top heavy tests, real-time non-discrimination tests and find out if they run checks on each and every payroll and 401(k) deferral file. They probably don’t, which means that they are not likely to be protecting you as a 3(16) fiduciary! What kind of an employee fiduciary would set up a “bad apple” plan anyway?
How do we fix America’s retirement problem?
Today’s traditional 401(k) providers have high and confusing costs, incomprehensible “user education,” proprietary, siloed platforms, and offer little to address administration and regulatory compliance complexity – the exact opposite of consumer-friendly. In fact, we believe that the current 401(k)’s archaic complexity is responsible for much of what’s broken about our retirement system today, and is a direct contributor to the $6.8 trillion retirement shortfall facing America. In fact, only 14% of small businesses provide a 401(k) versus 89% of large companies, meaning about 78 million Americans don’t have an employer-sponsored retirement plan, according to InvestmentNews. It doesn’t seem like traditional 401(k) providers, who often claim to be employee fiduciaries, are actually capable of fixing the country’s retirement problem.
At ForUsAll, we believe that if we can offer a 401(k) plan that is simple for a small business to administer, takes on the investment AND administrative fiduciary roles to lower the liability to the small business and its executives, proactively monitors the plan and administration, offers reasonable fees to both the employer and employees, then we might be able to help many Americans save for retirement.
If your small business is struggling with being an employee fiduciary, or is challenged by the expense or administrative hassle of a non-technology 401(k) provider, reach out to us here! We’d be happy to walk you through our fees and explain how we can offer both a 3(16) and 3(38) fiduciary. Talk to a real employee fiduciary today!