Fiduciary Considerations in a 401(k) Plan

Posted on Sep 12, 2022

It’s important for employers to understand and meet their 401(k) fiduciary responsibilities and comply with ERISA rules to ensure the proper management of their workers’ and retirees’ plan assets. A 401(k) plan must have at least one named fiduciary, either a person or entity, that has control over the plan’s operation. The plan sponsor is always considered a fiduciary to the plan, and other fiduciaries may include the trustee, investment advisors, and any individuals who are responsible for administering the plan or managing the plan’s assets.

Because they act on the behalf of retirement plan participants, fiduciaries are subject to certain standards of conduct and have a duty to act prudently. The Department of Labor (DOL) notes that these responsibilities include the following. Plan fiduciaries must:

• Act solely in the interest of plan participants and their beneficiaries and disclose any conflict of interest
• Carry out duties prudently, which means properly investigating and selecting investment options for plan participants
• Follow the terms of the plan documents, update when necessary, and ensure the plan document is current
• Diversify plan investments to reduce risk
• Pay only reasonable plan expenses

In addition, plan fiduciaries must ensure that a fidelity bond is in force in accordance with ERISA, monitor for any prohibited transactions, and respond to all inquiries from a participant or beneficiary. Any communications that are misleading or omit key information can be considered a violation and breach of duty.

Recent class action lawsuits underscore the need for plan fiduciaries to conduct periodic due diligence and document steps taken to improve investments and retirement plan fees. In 2021, class action filings challenging 401(k) and 403(b) plan fees and investments resulted in record settlements totaling billions of dollars. Under DOL regulations, there must be at least three different investment options so that employees can diversify their portfolio. Plan fiduciaries must also provide information about each investment option so that participants can make informed decisions. Participants must also be allowed the opportunity to change their allocations at least once per quarter.

Employers have the option to hire a service provider to handle fiduciary functions. Selecting the service provider is in and of itself a fiduciary function, and employers are responsible for monitoring the service providers’ performance.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.