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A Simple Guide for Meeting 401(k) Fiduciary Responsibilities

Eric Droblyen

February 8, 2023


Over the past decade, several high-profile 401(k) fee lawsuits and DOL efforts to implement a fiduciary standard for professional investment advice have put 401(k) fiduciary responsibility in the national spotlight. Unfortunately, this attention has done little to help employers understand and meet their 401(k) fiduciary responsibilities. This confusion is a big problem because employers risk personal liability when these responsibilities are not met.

Not helping matters are 401(k) providers that fearmonger fiduciary responsibilities to sell complicated outsourced fiduciary services that don’t effectively reduce an employer’s liability. Often, this sales tactic transforms employer confusion about their fiduciary responsibilities into panic about their fiduciary liability.

In truth, it doesn’t need to be difficult for employers meet their 401(k) fiduciary responsibilities and avoid liability. They just need to understand these responsibilities and how they can be met with professional assistance.


The Employee Retirement Income Security Act (ERISA) states that a person is a 401(k) fiduciary "to the extent that he exercises discretionary control or authority over plan management or authority or control over management or disposition of plan assets, renders investment advice regarding plan assets for a fee, or has discretionary authority or responsibility in plan administration." While ERISA defines several 401(k) fiduciary roles, a person’s fiduciary status is based on their plan function.

In Meeting Your Fiduciary Responsibilities, the DOL lists the general responsibilities of a 401(k) fiduciary as:

  • 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.

More specifically, employers can meet their fiduciary responsibilities by taking action in the following six areas:

1. Meeting investment-related responsibilities

401(k) fiduciary responsibilities related to plan investments can seem particularly scary to employers, but they’re in fact the easiest to meet. They boil down to picking a fund lineup of “prudent” investments that gives plan participants access to a broad range of financial markets - so they can diversify their accounts. A prudent investment is simply one that meets its investment objective for a reasonable fee.

Picking prudent funds is easy with index funds – which are designed to track a market benchmark (e.g., the S&P 500 index). This is true because comparable index funds (i.e., funds with the same market benchmark) from any of the largest providers – including Vanguard, Blackrock, Schwab, and Fidelity – offer similar returns and low fees. This uniformity makes it easy for employers to avoid underperforming funds with excessive fees that increase their fiduciary liability. That’s in sharp contrast to comparable actively-managed funds – whose returns and fees can differ dramatically.

Meeting the diversification requirements of ERISA section 404(c) is the key to offering plan participants. access to a broad range of financial markets. These requirements are not difficult to meet. In fact, a simple 3-fund lineup that includes equity (stock), fixed income (bond), and capital preservation (money market or stable value) funds can do the trick.

A simple way for employers to meet their investment-related fiduciary responsibilities is modeling their 401(k) fund lineup after the Federal government’s Thrift Savings Plan (TSP) – whose prudent investments would meet ERISA 404(c) diversification requirements. While the funds used by the TSP are not available to the general public, it’s possible for any employer to model their fund lineup after the TSP using commercially-available index funds.

Employers can also outsource their investment-related 401(k) responsibilities to an ERISA 3(38) financial advisor.

2. Meeting administration-related responsibilities

There is good news/bad news for employers about their administration-related 401(k) fiduciary responsibilities. The bad news is that these responsibilities are numerous. They include:

  • Keeping the governing plan document in compliance with applicable law.
  • Operating the plan in accordance with its plan document, including:
    • Letting employees participate based on the plan’s age and service eligibility requirements
    • Allocating contributions to participant accounts based on the compensation definition used by the plan
    • Paying out participant distributions, while forfeiting any non-vested portion of their account
    • Administering the participant loan program (if applicable)
    • Splitting participant accounts pursuant to a Qualified Domestic Relations Order (QDRO)
  • Meeting ERISA participant disclosure and government reporting requirements.
  • Completing any necessary plan testing and timely correcting any test failures.
  • Maintaining plan records in accordance with ERISA document retention rules.

The good news? A qualified 401(k) provider will complete most of the administrative tasks necessary to meet these responsibilities. For employers to confirm these tasks have been completed, I recommend using a checklist.

3. Paying only reasonable expenses from plan assets.

Employers have a fiduciary responsibility to pay only "reasonable" 401(k) fees from plan assets. Keeping 401(k) fees in check is of the most important fiduciary responsibilities because even small excessive fee amounts today can dramatically reduce a participant’s account balance decades from now.

The problem? While this responsibility is clear, the definition of “reasonable” is not. ERISA does not define the word and government agencies only provide general guidance for evaluating 401(k) fees. The Department of Labor (DOL) suggests “establishing an objective process to aid in your decision making". This process should include an understanding of the fees and expenses you will pay and a review of those charges as they relate to the services to be provided and the investments you are considering.”

An “objective process” is generally understood to mean benchmarking 401(k) fees vs. competing 401(k) providers or industry averages. For an employer to benchmark their 401(k) fees vs. competing 401(k) providers, they can:

401(k) fee benchmarking should be done at least every 3 years.

High 401(k) Fees

4. Depositing employee contributions timely

Employers have a fiduciary responsibility to deposit employee contributions (including any participant loan repayments) in their 401(k) plan as soon as these contributions can be reasonably be segregated from their general assets (the “general rule”), but in no event later than the 15th business day of the month following the month in which the contributions were withheld from employee wages. Small employers (100 or less employees) can meet the general rule automatically by depositing employee contributions no later than the 7th business day following the date of the withholding.

5. Maintaining adequate ERISA fidelity bond coverage

Employers must be covered by an ERISA fidelity bond due to their discretionary authority to control the assets of their 401(k) plan. This bond protects 401(k) plan participants from dishonest acts by the employer. Generally, the minimum coverage must equal the lesser of 10% of plan assets or $500,000. Bonds are available from a surety or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties.

6. Selecting and monitoring 401(k) service providers

Selecting competent service providers with reasonable fees may be the most important - and confusing – 401(k) fiduciary responsibility. This is the case for two reasons - 401(k) plans are technically complex and the services offered by 401(k) providers can vary dramatically in breadth, depth and price.

To meet this responsibility, I recommend employers follow a 2-step process:

  1. Determine the 401(k) services their plan needs
  2. Use a checklist to compare 3 or more 401(k) providers

Once a 401(k) provider has been selected, employers must “monitor” that provider’s job performance – to ensure they are completing their assigned responsibilities (fiduciary or not) competently, timely and for reasonable fees. To make this fiduciary responsibility as easy to meet as possible, I recommend employer only hire 401(k) providers with transparent services.

Employers should not fear their 401(k) fiduciary responsibilities!

While hiring an ERISA 3(38) financial advisor can be a great idea, I don’t recommend that employers outsource other 401(k) fiduciary responsibilities to their 401(k) provider. That’s because monitoring a 401(k) provider with fiduciary (discretionary) control over plan assets or administration can be difficult to impossible – which, ironically, increases an employer's fiduciary liability.

Instead, I recommend employers meet their 401(k) fiduciary responsibilities themselves. They are nothing to be afraid of. With some basic guidance, they can be easily met. 

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