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In this series Empirical advisors answer common questions about financial planning and investing as an individual. If you have a question for our advisors, please leave your name and question in the comment section at the bottom of this article.

Recognizing Your Fiduciary Responsibility as a 401K Plan Sponsor

Are you an employer who is currently offering a retirement plan to your employees, or are you thinking about offering a plan in the future?  As a sponsor of a company retirement plan, you have a fiduciary responsibility to the plan participants that is often overlooked or misunderstood.  When it comes to methods to provide retirement plans, there are many options available to employers and it can be difficult to assess whether you are meeting your duties as a fiduciary.

Offering a retirement plan to employees can be a very trying experience, but employees and employers can benefit from having one in place.  While the fiduciary responsibilities required of you as an employer can be challenging to navigate, we want to give you a brief overview to help you start thinking about how you can meet these responsibilities.

The Written Plan

First, it is important to have a written plan that guides the operations on a daily basis.  You will need to have a trust fund to hold the assets, a recordkeeping system, and documents that detail plan information to employees participating in the plan and the government.

The Fiduciary

Each plan needs to have at least one fiduciary.  Trustees, investment advisors, and any other person who can control the plan is considered to be a fiduciary.  One option you can consider is hiring outside advisors with the knowledge necessary to make decisions that are in the best interest of plan participants.  By hiring an investment advisor with expertise in the area of investment management, employers can focus on their business and alleviate their fiduciary duty.

Documenting the Process and Limiting Liability

Fiduciaries can be held personally liable if they do not follow the standards of conduct detailed in the written plan.  In order to limit liability, you and other fiduciaries should meticulously document your processes as you execute your fiduciary responsibilities.  Another way to limit liability is to offer at least three different investment options and provide employees with the necessary information to make informed decisions about the options available to them.  One way this can be accomplished is by hiring an investment advisor who offers a multitude of investment options.  If you do choose to hire an outside investment manager, employers are still required to periodically monitor the advisor to ensure they are operating within the guidelines established in the written plan.

Employee Contributions

Do you know how long you have to deposit salary reduction contributions into participants’ accounts?  If your plan has 100 or more participants, the contributions must be deposited as soon as possible, but no later than the 15th business day of the month following the payday.  If you have fewer than 100 participants, you have until the 7th business day following the payday.

Another Fiduciary Function – Hiring a Service Provider

It is important to take care in interviewing potential service providers, particularly when evaluating how they manage assets and the fees involved.  Fees can vary widely, and some services cost extra, so be sure you make an apples-to-apples comparison when evaluating service providers.  It is also prudent to check whether the firm has experience and the qualifications necessary to handle your type of situation.

The Review Process

Monitoring a service provider is another fiduciary function.  Consider establishing a formal review process that might include reviewing performance, checking fees charged, and investment turnover.  Feel free to contact Empirical for a comprehensive list of questions you should address during the review process.

Education

Before investing, participants need access to an accessible, formatted document, which details fees, expenses, and other investment information.  Investment advisors can help walk employers through this process.  They also can provide investment education to aid participants in making informed decisions.  At Empirical Wealth Management, we provide educational resources to plan participants in order to help them achieve their financial goals.

Prohibited Transactions

Be sure to carefully study potential conflicts of interests, prohibited transactions, and exemptions.  The rules can be complicated.  For example, a common exemption is that most plans allow participants to take loans from their accounts, but loans must be available to all participants at a reasonable rate of interest and be adequately secured.

Employer Stock

If your plan allows participants to invest in employer stock, there are many rules to consider.  For instance, employee contributions invested in employer securities can immediately be divested.  On the other hand, when employer contributions are invested in employer securities, participants must have three years of service in order to divest of the employer security.

Reporting Information

Participants have a right to a summary plan description, summary of material modification, and individual benefit statement.  These documents explain plan features, update participants of any changes in the plan, and information on account balances.  Each document has its own unique requirements and how often it must be furnished.

Form 5500 generally is filed with the Federal Government and explains information about how the plan operates.

Conclusion

While we covered an extensive list of responsibilities of the employer, this list is by no means comprehensive.  We hope it highlights the complexity of employer plans and the fiduciary responsibilities involved.  Due to the regulatory complexity, we also hope we highlighted how hiring investment advisors and third-party service providers can help alleviate some of the work involved with establishing and maintaining a plan.  Monitoring an investment manager or third-party service provider is a much easier task than acquiring detailed investment knowledge and managing a plan.

If you are not sure about your fiduciary responsibilities or need help establishing a new plan, feel free to contact us. We would be happy to provide advice on what to look for in a third-party service provider and investment managers.

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About Shan Zubair

As a financial advisor, Shan works closely with his clients to help define and commit to their retirement and investment objectives. Shan is a Certified Financial Planner™ and Chartered Mutual Fund Counselor (CMFC®).

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