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Any Individual or entity with discretionary authority over a 401(k) plan’s administration or investments is considered a “fiduciary” to that plan. 401(k) plan fiduciaries ordinarily include the employer, trustees, and investment advisers. Attorneys, accountants, recordkeepers, brokers and insurance agents are generally not fiduciaries. The key to determining whether an individual or an entity is a fiduciary is whether they can exercise discretionary control over your plan - a fiduciary title is not required. Generally, the employer is their 401(k) plan’s primary fiduciary.

Fiduciaries have important responsibilities and are subject to strict standards of conduct because they act on behalf of 401(k) participants and their beneficiaries. These responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

Over the past decade, several high-profile 401(k) fee lawsuits have put the topic of 401(k) fiduciary responsibilities in the national spotlight. Unfortunately, this attention has been focused mostly on employer liability for failing to meet their fiduciary responsibilities. It’s done little to educate employers regarding their specific responsibilities.

The good news? While the consequences of failing to meet 401(k) fiduciary responsibilities can be severe, it’s just not that difficult to avoid liability. There are only 5 key sources of 401(k) fiduciary liability today:

1. Paying excessive fees

Without question, the #1 source of 401(k) fiduciary liability is paying excessive plan fees. This makes sense given the corrosive effect of fees on participant account balances. Fiduciaries must ensure the services provided to their plan are necessary and that contracts or arrangements for services, and the cost of those services, are reasonable.

You shouldn’t expect a lot of objective help from your 401(k) provider in judging the reasonableness of their fees, but fee evaluations do not need to be difficult. They can be done using a 3 step process:

  • Collect the “408(b)(2)” disclosure for each plan service provider
  • Review each disclosure for completeness
  • Benchmark the service provider’s fees for reasonableness

I discuss these steps in greater depth in New Year’s Resolution # 1 for Fiduciaries – “I WILL Evaluate My 401(k) Plan Fees."

2. Selecting imprudent investments

Today, most excessive 401(k) fee lawsuits relate to hidden fees buried in plan investments. Hidden fees can make it difficult for 401(k) fiduciaries to “prudently” select investments. A prudent investment is one that meets plan investment objectives without charging excessive fees.

Unfortunately, many 401(k) providers don’t make it easy for you to meet this responsibility. They can offer conflicted advice that results in excessive fees and reduced investment returns. When this advice is followed, fiduciary liability can result.

My suggestion – Do 2 things when selecting plan investments:

  • Use index funds as investment performance benchmarks – Given the universal availability of “passively-managed” index funds, all 401(k) participants should always earn no less than market returns on their account over time. While it’s OK for 401(k) fiduciaries to pay more for “actively-managed” funds or insurance products designed to beat an index, the performance of these investments should outweigh any additional expense.
  • Choose the lowest expense share class – Mutual funds are often offered in multiple share classes, each with different fees. Fiduciaries should always choose the share class with the lowest expense.

3. Not remitting participant contributions timely

You must deposit participant contributions (pre-tax/Roth 401(k) deferrals, loan payments) to your plan’s trust account on the earliest date they can reasonably be segregated from general corporate assets. For plans with fewer than 100 participants, a deposit is considered timely if it’s made within 7 business days after the date the contributions would have been otherwise payable in cash. For larger plans (100 participants or more), the determination of whether the deposit was timely is based on facts and circumstances.

Under their Employee Contributions Initiative, the DOL actively enforces these deposit standards. You can be subject to civil penalties if they are not met. Given this potential liability, you should prioritize these deposits.

4. Not meeting reporting and disclosure requirements

401(k) plans are subject to various government reporting and participant disclosure requirements under ERISA. I’m not going to lie, these requirements are numerous and complex. However, an experienced 401(k) provider will provide you with simple instructions for meeting the requirements.

When required government reports (e.g., Form 5500) are not filed timely, civil penalties can result. When required disclosures (e.g., safe harbor notices) are not distributed to participants timely, civil penalties, plan disqualification by the IRS, or lawsuits from participants harmed by the lack of disclosure can result.

5. Failing to follow plan document terms

Under IRS rules, a 401(k) plan must operate in accordance with the terms of its written document to maintain its tax-favored status and prevent a breach of fiduciary duty. When a plan fails to operate according to its written terms, the IRS considers the issue an “operational defect.” A 401(k) plan can be disqualified for not fixing an operational defect. The IRS offers tips for avoiding, finding and fixing common operational defects on its website.

401(k) fiduciaries must be sure they understand the terms of their written plan document and operate their plan in compliance with it daily. While employers are subject to complex fiduciary responsibilities under ERISA, meeting these responsibilities doesn’t need to be difficult. The key to reducing fiduciary liability is responsibility transparency and guidance from a qualified service provider.

While employers are subject to complex fiduciary responsibilities under ERISA, meeting these responsibilities doesn’t need to be difficult. The key to reducing fiduciary liability is responsibility transparency and guidance from a qualified service provider.

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