What is a 401(k) Fiduciary?

June 26, 2015
5 min read
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Behind every great small business 401(k), stands a prudent and diligent fiduciary. At least that’s what a lawyer is likely to say. That’s because setting up and managing a 401(k) takes a lot of work and attention to get right.

401(k) fiduciary responsibilities

That’s where the fiduciary comes in – the fiduciary is legally responsible** for making sure employees have access to a quality, well run 401(k).** While large companies tend to have HR and benefits professionals to run the 401(k), small businesses often don’t, so this responsibility usually falls to the small business owner. But hey, if you’re running a small business you already wear a lot of hats (marketer, sales, manager, HR), so why not add one more?

Luckily, you don’t have to become a 401(k) expert if you don’t want to. Small business owners can delegate much of their day-to-day responsibilities to expert 401(k) fiduciaries. Delegating to experts not only reduces your legal liability but also takes tedious work off your plate. Because who doesn’t want to spend time on other things… like, um… growing their business.

I’ll go into more detail later, but there is basically a spectrum of fiduciary options. On one end, you can do all the work yourself (and take on legal liability). On the other end, you can hire a retirement expert and delegate virtually all of your day-to-day responsibility (called a 3(16) fiduciary). In-between you can hire investment fiduciaries to just give you investment advice (3(21) fiduciary) or actually make the 401(k) investment decisions (3(38) fiduciary).

Who is a 401(k) Fiduciary?

If you’re responsible for setting up or managing the 401(k), I have great news for you, there’s a good chance you are a fiduciary! In fact, ERISA (the legislation governing workplace benefits) requires that each 401(k) plan have at least one named fiduciary. For a small business, the named fiduciary is often the business owner, the office manager/head of HR, or even a company’s board of directors. To know for sure, you can check out the company’s plan document.

ERISA states that anyone that uses “discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control.”

Save time, limit liability by hiring a 401(k) fiduciary

If you really want to take personal liability for your plan, follow this list of ways to stay on top of your fiduciary responsibilities. Otherwise, read on about how you don’t have to go at it alone! In fact, a company can hire professionals to take on certain fiduciary responsibility and the associated legal liability. Basically, you’ll be responsible for deciding who to hire, then the professional fiduciary will be on the hook for their fiduciary responsibilities. While you will be on the hook for hiring the right professional, if you follow and document a prudent process in hiring them, you should be in good shape (e.g., think twice about hiring your nephew who just graduated from college with little experience, etc.).

What is a fiduciary supposed to do, exactly?

Essentially, a good 401(k) fiduciary should be just like your knowledgeable, trustworthy uncle that helps family members with their finances, only the 401(k) fiduciary is the metaphorical uncle for all participants in the 401(k) – making sure that the investment options are good, the 401(k) rules are being followed and double-checking to make sure fees are reasonable. Most importantly, just like that trustworthy uncle – a fiduciary needs to act solely in the interest of plan participants.

Still a little too vague? Check out this (short) list of key fiduciary responsibilities for managing a 401(k).


In addition to the items in the checklist, the 401(k) fiduciary responsibilities cover everything from strategic decisions (like which investments, or reviewing financial reports) to more mundane administrative stuff (like documenting and correcting operational errors).

To get a sense for what’s involved, let’s just look at one area of fiduciary responsibility – investment monitoring and selection. Here, a prudent fiduciary would likely begin by establishing an investment policy statement for the plan (which states the principles underlying how the plan investments will be managed). With investment policy statement in hand, the fiduciary should analyze investments, paying close attention to: investment style, investment fees, volatility, and performance. Any investments that no longer seem prudent should probably be placed on an investment watchlist or removed altogether. Sound like a lot of work? Well, it is and it should be done at least quarterly.

But most importantly, the 401(k) fiduciary should be part historian, part librarian – as you’ll soon find out, if you choose to manage the 401(k) yourself.

Types of professional 401(k) fiduciaries

So which 401(k) responsibilities can you delegate? Well, apart from who you hire, that’s kind of up to you. Whether you just want a little help picking investments or want to delegate most of the work to someone else, you have options. Below are three common fiduciary classifications.

Meet Diana the 3(21) Fiduciary

Diana will be there to help you analyze, select, and monitor the investments in your 401(k). Diana will likely give you recommendations on what investments to offer, but you will ultimately make the decision. Diana’s friends call her a co-fiduciary. In short, she’ll do the investment legwork but you are ultimately responsible for making the final investment decision.

But, Diana won’t make investment calls for you and isn’t likely to manage the day-to-day operations of your 401(k) plan. If there is an operational error, Diana might share some of her experience, but you’ll ultimately have to decide how to correct the problem.

Meet Al the 3(38) Fiduciary

Al takes the whole investment monitoring one big step further – Al will actually determine the investment options for your 401(k) plan for you and make changes if any of the investments are no longer prudent for your employees. Al stands by his work, so he’ll probably even indemnify you in writing for his investment decisions and should always keep you in the loop when changes are made.

But, Al is like Diana when it comes to the day-to-day operations – he’s typically more of a big thinking investment guy and won’t likely take on the formal responsibilities and legal liability of plan administration.

Meet Susan the 3(16)

How to describe Susan… if lawyers had a sense of humor they’d let me call her a Super Fiduciary, because Susan does the investment stuff plus the day-to-day operations of your plan (I think that’s pretty Super). But we don’t want to get in trouble with our lawyers, so we’ll use the official Department of Labor title for Susan – Named Plan Administrator.

As Named Plan Administrator, Susan will likely:

  • Track employee eligibility to participate in the plan
  • Maintain all necessary records (in a pretty file, hopefully)
  • Interpret the plan rules
  • Get the appropriate fidelity bonds
  • Provide documents to participants
  • Send the Summary Plan Document and Summary of Material Modifications to plan participants
  • Provide appropriate notices/forms/disclosures to employees (tax notices, enrollment information, fee disclosure notices, J&S notices, etc.)
  • Review and approve financial reports, perform investment reviews, etc.
  • Answer plan questions
  • Evaluate, process and document participant claims
  • Fix stuff when things go wrong (i.e., plan operational errors)
  • Evaluate and, if appropriate, process Qualified Domestic Relief Orders (when people get divorced)

Bringing it home…

In short, if you’d rather focus your time on your business and like the idea of transferring liability to 401(k) experts, then hiring a 3(16) fiduciary can be a pretty smart move. (Update January 2017: you can also read more about what the press thinks about our fiduciary work in an InvestorJunkie review of ForUsAll.)

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