As a business owner, offering a 401(k) plan to your employees can be a valuable benefit for yourself, your team and your tax return. However, it also comes with important responsibilities and potential liabilities.
The degree of liability you take on as a plan sponsor is dependent on the particulars of your plan. In reality, most business leaders don’t fully understand their plan or what level of liability they’re responsible for which is risky.
In this article, we’ll discuss three primary levels of fiduciary responsibility and the role you play based on the type of plan you have. By understanding these key concepts, you can ensure that you are meeting your fiduciary duty while safeguarding your company’s financial future.
Your Fiduciary Responsibility as a Plan Sponsor
When you sponsor a 401(k) plan for your employees, you take on the role of a fiduciary. As a fiduciary, you have a legal duty to act in the best interests of your plan participants and their beneficiaries. Failing to meet these responsibilities can lead to severe consequences, including potential legal liability.
There are three levels of responsibility that must be accounted for: a 3(21) fiduciary, a 3(38) fiduciary, and a 3(16) administrative role.
Depending on who serves in those three roles determines how much liability you take on as the plan sponsor. You can take on a lot of liability or delegate it to others.
Understanding the Role of a 3(21) Fiduciary
A 3(21) fiduciary is an investment advisor or other qualified professional who provides guidance and recommendations regarding the selection and monitoring of the investment options offered in your company’s 401(k) plan.
If you’re working with a Registered Investment Adviser like our team at Bland Garvey, then you have someone serving in the role of 3(21) fiduciary.
Here’s what you need to know about their role:
What is a 3(21) Fiduciary?
A 3(21) fiduciary acts as a co-fiduciary with you, sharing responsibility for the investment decisions made within the plan. They provide professional advice and make recommendations based on their expertise and knowledge of the market.
Responsibilities of a 3(21) Fiduciary
The primary responsibility of a 3(21) fiduciary is to ensure that the investment options in your 401(k) plan are carefully selected and monitored. This includes conducting due diligence on the available investments, assessing their performance, and recommending any necessary changes.
They provide education for participants ensuring they understand their options and answer any questions they may have.
In addition, they assist in drafting and maintaining the Investment Policy Statement (IPS), which outlines the plan’s investment objectives and guidelines.
Benefits of Working With a 3(21) Fiduciary
When you work with a 3(21) fiduciary, you gain access to their expertise and experience in managing retirement plans. Their knowledge can help you navigate the complex landscape of investment options, reducing the risk of making poor choices.
Additionally, working with a 3(21) fiduciary demonstrates your commitment to fulfilling your fiduciary duties, enhancing your credibility as an employer.
At Bland Garvey we act at the 3(21) fiduciary when we manage a client’s 401(k) plan.
Understanding the Role of a 3(38) Fiduciary
While a 3(21) fiduciary shares responsibility with you, a 3(38) fiduciary takes on full responsibility over the investment decisions within your 401(k) plan.
Often, business owners don’t realize that they carry this responsibility as a plan sponsor if they haven’t outsourced it to a qualified investment manager.
Here’s what you should know about their role:
What is a 3(38) Fiduciary?
A 3(38) fiduciary is an investment manager who assumes all responsibilities for selecting, monitoring, and managing the investment options in your 401(k) plan. They have the authority to make investment decisions without seeking your approval.
Key Advantages of Working with a 3(38) Fiduciary
One significant advantage of having a 3(38) fiduciary is that it shifts the burden of investment decision-making away from you as the plan sponsor. By delegating this responsibility to a qualified professional, you can focus on other aspects of running your business. Furthermore, a 3(38) fiduciary can provide greater protection against potential liability, as they assume full accountability for the investment choices.
Factors to Consider When Selecting a 3(38) Fiduciary
Choosing a 3(38) fiduciary requires careful consideration. Look for a reputable firm or individual with extensive experience in managing retirement plans. Evaluate their investment philosophy and fee structure to ensure alignment with your company’s goals.
Additionally, consider their level of communication and transparency, as regular updates and clear reporting are essential for maintaining trust and accountability.
At Bland Garvey we work with a firm that acts as the 3(38) fiduciary for our clients who have us manage their 401(k) plans.
Understanding the Role of a 3(16) Fiduciary
A 3(16) fiduciary, known as an “administrator,” has specific administrative duties and responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA).
Unlike the 3(21) and 3(38) fiduciaries focused on investment matters, the 3(16) fiduciary handles day-to-day operational tasks related to the administration of the plan itself.
What is a 3(16) Fiduciary?
The core function of a 3(16) fiduciary is to take charge of administrative tasks, such as filing required reports, ensuring compliance with ERISA regulations, and managing participant communications.
They play a critical role in maintaining plan documentation, preparing necessary disclosures, coordinating audits, and overseeing service providers.
Reasons to Appoint a 3(16) Fiduciary
By appointing a 3(16) fiduciary, you gain an experienced partner who can guide you through the complexities of administering a 401(k) plan.
Appointing a 3(16) fiduciary provides several advantages for plan sponsors. First and foremost, it reduces your liability exposure by entrusting important administrative tasks to a professional.
With their oversight, you can have confidence in the accuracy and compliance of your plan’s administrative functions, helping protect both yourself and your employees while offloading time-consuming administrative duties.
Ensuring Compliance and Mitigating Liability
Serving as a 401(k) plan sponsor carries significant responsibility, particularly regarding fiduciary obligations.
To ensure compliance and mitigate liability risks, there are steps you can take regardless of whether you engage a 3(21), 3(38), or 3(16) fiduciary. These actions help ensure you’re acting in the best interest of your plan’s participants while keeping your plan costs down:
- Educate Yourself: Stay informed about ERISA regulations, updates, and industry trends related to retirement plans. Attend educational workshops, consult professionals, and seek guidance to enhance your fiduciary knowledge.
- Conduct Due Diligence on Service Providers: When engaging any service provider related to your 401(k) plan, perform thorough due diligence. Ensure they have expertise, experience, and a strong track record of serving retirement plans effectively.
- Monitor Plan Fees: Review and benchmark fees charged by service providers regularly. Be sure you understand where the fees show up in your plan. Some firms bury them so they’re hard to find unless you know what to look for. Excessive fees can erode participants’ savings.
- Communicate Effectively with Participants: Provide clear, concise, and regular communication to keep plan participants informed about investment options, plan changes, and important updates. Foster transparency and offer educational resources to empower participants in making informed decisions.
Being proactive in fulfilling your fiduciary responsibilities not only protects your employees’ financial well-being but also safeguards your reputation as a business owner committed to their best interests.
Empowering Business Owners Through Fiduciary Knowledge
Understanding the roles of different fiduciaries involved in managing a 401(k) plan is essential for business owners who want to ensure compliance and mitigate liability risks. When you understand the duties and responsibilities of 3(21), 3(38), and 3(16) fiduciaries, you can make informed decisions about how to best manage your plan and support your employees’ long-term financial success.
Key Takeaways
- A 3(21) fiduciary provides professional advice and recommendations on investment options, and education for participants. They do not, however, have final decision-making authority.
- Engaging a 3(38) fiduciary transfers investment decision-making authority and liability from the plan sponsor to the fiduciary.
- A 3(16) fiduciary handles administrative tasks and ensures compliance with a host of ERISA requirements.
- By delegating responsibilities to knowledgeable fiduciaries, you can optimize your plan’s performance and minimize liability risks.
How Can You Ensure Compliance?
Reflect on how you currently manage your 401(k) plan and consider whether engaging a fiduciary would enhance compliance and efficiency. Assess the benefits and potential drawbacks of each fiduciary role in relation to your organization’s goals and objectives.
At Bland Garvey, we understand the importance of comprehensive retirement planning for both employers and employees.
Our team of experienced professionals can help navigate the complexities of managing a 401(k) plan, ensuring compliance, and reducing fiduciary risk. Contact us today to explore how we can support your business and provide your employees with exceptional retirement benefits.
