Though 401(k) plans are best known for providing valuable tax-advantages for employees saving for retirement, an often-overlooked principle of employer-sponsored retirement plans is the protection afforded to participants by the Employee Retirement Income Security Act of 1974 (“ERISA”) against acts or omissions of those operating the plan.
Recognizing the importance of ensuring workers have access to fair and secure retirement savings, Congress has imposed strict standards of conduct, responsibility, and obligations for fiduciaries of employee benefit plans and provided for remedies and sanctions in the event of any breach of fiduciary responsibilities.
Among the many safeguards mandated by ERISA is the requirement that any individual exercising control over the retirement plan be held to the highest standards of fiduciary conduct. In effort to meet these standards, employers often rely on professional service providers to ensure their retirement plan is operated in accordance with ERISA. In relying on outside providers, it is important that employers not only understand the roles and responsibilities of service providers who serve as fiduciaries to their plan (and those who don’t), but also the fiduciary roles and responsibilities of the company itself, as well as individuals acting on behalf of the company with regard to the plan.
What Does It Mean to Be A Fiduciary?
Employee benefit plans must name at least one fiduciary who will have authority to control and manage plan operation and administration. The core obligation of a fiduciary to an employer-sponsored 401(k) plan is to carry out his or her duties solely in the interest of plan participants (including beneficiaries). To this end, fiduciaries must:
- Operate the plan for the exclusive purpose of providing benefits to its participants,
- Ensure plan expenses are reasonable,
- Act with due "care, skill, prudence and diligence",
- Diversify the plan's investments to minimize the risk of significant losses, and
- Follow the terms of the governing plan documents.
Additionally, fiduciaries must avoid engaging in prohibited transactions as defined under section 406 of ERISA. A prohibited transaction refers to a transaction involving the transfer, use or borrowing of plan assets by any “party in interest”. A party in interest is defined very broadly under ERISA, to include everyone from fiduciaries themselves, to non-fiduciary service providers, company owners, directors or officers, family members, as well as employees of the company (unless otherwise entitled to receive benefits from the plan).
Prohibited transactions also include conflicts of interest or self-dealing by a fiduciary with regard to the plan. In short, fiduciaries must not permit anyone to benefit from the use of plan assets except the plan participants or beneficiaries.
Fiduciaries to a plan could include a Plan Sponsor, Trustee, Plan Administrator, Investment Manager and other individuals who exercise control over the plan.
Understanding Your Guideline 401(k) Plan Fiduciaries
Plan Sponsor & Named Fiduciary
As a sponsor of your Guideline 401(k) plan, your company is the Plan Sponsor and also the designated Named Fiduciary of the plan. ERISA permits a Named Fiduciary to designate other fiduciaries to oversee various plan functions. In doing so, the Named Fiduciary may be relieved from liability for acts or omissions of designated fiduciaries so long as the Named Fiduciary itself carries out its own fiduciary obligation to monitor service providers.
Your company must appoint a trusted individual to serve as the trustee with oversight of the trust account set up by Guideline for your plan. The trustee is responsible for managing and controlling plan assets, which include carrying out three essential responsibilities:
- Invest, control and manage plan assets,
- Pay benefits to participants and/or beneficiaries, and
- Maintain trust account records and furnish an annual report.
The role of the trustee is typically filled by someone with sufficient seniority and tenure, such as a CEO, CFO, Founder or Partner. If an appointed trustee is no longer affiliated with the plan sponsor (the company), then a successor should be timely appointed by the company.
As a full-stack 401(k) service provider, Guideline will carry out each of these critical functions on behalf of the trustee (described further below).
By designating a qualified Investment Manager, the Trustee may be relieved from liability for acts or omissions of the Investment Manager. An Investment Manager appointed in accordance with section 3(38) of ERISA must be a registered investment adviser under the Investment Advisers Act of 1940 or under applicable state law, a bank, or a qualified insurance company. By appointing an Investment Manager, the employer may rely on the investment expertise of the Manager in maintaining the plan investments. However, it also relieves the trustee of the obligation to invest or manage plan assets, and in turn, relieves the trustee of liability for the acts or omissions of the Investment Manager with regard to the plan. To be regarded as a 3(38) fiduciary. The Investment Manager must have authority to manage and control plan assets and must acknowledge its fiduciary status in writing.
Guideline Investments, LLC, a subsidiary of Guideline Technologies,Inc., is a registered investment adviser appointed as the 3(38) Investment Manager fiduciary for your Guideline 401(k), with sole and exclusive authority over the Plan's investment options.
In this capacity, Guideline will carry out the trustee’s duty to invest, control and manage plan assets. In accordance with its duties, Guideline oversees plan investments in accordance with the plan’s Investment Policy Statement and also maintains discretionary authority over plan assets to help participants maximize their retirement savings.*
Third Party Plan Administrator
Plan Sponsors may also choose to delegate responsibility for administering the plan to a Third Party Administrator. Guideline takes on this role for your plan as the sole and exclusive Plan Administrator within the meaning of Section 3(16) of ERISA.
In carrying out its duties as the Plan Administrator, Guideline shall administer the plan in accordance with the written 401(k) plan document and approve and administer all benefit payments to participants and beneficiaries, including the timely processing of distributions, loans and hardship withdrawals, as well as provide required participant benefit statements and plan information to participants.
Finally, in Guideline’s capacity as a Recordkeeper, Guideline maintains the day-to-day recordkeeping for the 401(k) plan and is responsible for ensuring that records of trust activity are maintained and reconciled against the Custodian’s records. Guideline shall also furnish a trust statement at least annually. Additional detail about Guideline’s Recordkeeping Policies and Procedures may be found here.
Breach Of Fiduciary Duties
So why is it important for you to understand fiduciary roles and responsibilities? Because Congress and regulatory agencies have provided for numerous remedies, sanctions, and the ability to file a federal lawsuit to provide relief to participants who have been harmed as a result of a fiduciary breach, or where a fiduciary has otherwise misappropriated plan assets. Fiduciaries can be be personally liable for restoring assets to the plan in the event of losses or misuse of plan assets. Fiduciaries may also be held personally liable for the acts of co-fiduciaries if the fiduciary knowingly aided, abetted, enabled or otherwise failed to intervene or make a reasonable effort to remedy the breach.
This exposure to personal liability is why ERISA also requires each plan fiduciary who handles plan assets to be covered by a fidelity bond covering at least 10% of total plan assets.
Any individual or entity, regardless of whether they are a fiduciary or not, should not be permitted to handle or otherwise control plan assets unless they are adequately bonded.
Guideline maintains adequate bonding as a fiduciary to your plan. While other individuals may be considered fiduciaries for your Guideline 401(k) plan, additional bonding may not be required if the individuals do not receive, handle, disburse, or otherwise exercise custody or control of any of the funds or other property of the plan. However, some companies choose to obtain additional bonding for plan fiduciaries employed by the company for added protection.
Monitoring of Service Providers
While Guideline serves as a fiduciary to your 401(k) plan to carry out key functions, as a plan sponsor, your company retains an important oversight role to monitor Guideline as a service provider and ensure Guideline is carrying out its responsibilities to your plan. Guideline enables your company to carry out its oversight by providing visibility into plan-related activity in your easy-to-use Sponsor dashboard at my.guideline.com, which includes up-to-date information about participant enrollment and investments, participant and employer contribution activity, service fee invoices and distributions.
In carrying out your fiduciary responsibility, you must also ensure Guideline has the ability to obtain timely, accurate and complete information about your company and employees as well as ensure bank account information is kept up to date and adequately funded to enable Guideline to facilitate the timely transfer of all plan participant contributions (and loan repayments, if any) to the Trust.
Guideline Embraces the Highest Standards
Maintaining the highest standards of accountability, transparency, and responsibility is fundamental to Guideline’s mission. We have developed a platform to achieve these standards. In contrast to other providers, Guideline is a full-stack 401(k) provider responsible for carrying out all critical functions of your plan. This ensures that you know who is responsible for your plan and that plan assets are managed for the exclusive benefit of plan participants.
While Guideline strives to simplify the process for setting up and operating 401(k) plans for employers and minimize the administrative burden of managing 401(k) benefits, as a co-fiduciary, employers should ensure that they understand the roles and responsibilities of all fiduciaries to their Guideline 401(k) plan so you can do your part to ensure plan assets are adequately safeguarded.
*An exception exists for participants who have directed their own investments. In such event, plan fiduciaries will not be liable for any losses incurred by the participant.