As a plan sponsor or administrator of a 401(k) plan, you carry significant responsibilities that extend far beyond simply offering retirement benefits to your employees. The fiduciary duties imposed by the Employee Retirement Income Security Act (ERISA) create a complex web of obligations that require careful attention, ongoing diligence, and often professional guidance to navigate successfully.
Understanding Your Fiduciary Role
When you sponsor a 401(k) plan, you assume a position of trust that the Department of Labor takes very seriously. As a fiduciary, you’re legally obligated to act solely in the interest of plan participants and beneficiaries, with the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. This means every decision you make regarding the plan must prioritize participant welfare above all other considerations, including the company’s bottom line.
The scope of these responsibilities is broader than many plan sponsors initially realize. Your fiduciary duties encompass selecting and monitoring investment options, ensuring fees are reasonable, providing adequate participant education, following plan documents, and maintaining proper plan governance. Each of these areas presents its own challenges and potential pitfalls.
The Challenge of Investment Selection and Monitoring
One of the most critical fiduciary responsibilities involves the selection and ongoing monitoring of investment options within your plan. This isn’t a “set it and forget it” proposition. You must conduct a prudent process to select investment options, document your decision-making, and regularly review fund performance, fees, and appropriateness for your participant population.
Many plan sponsors struggle with this requirement because it demands financial expertise that may fall outside their core competencies. How do you evaluate whether a fund’s expense ratio is reasonable? When should an underperforming fund be replaced? How do you balance offering enough choices without overwhelming participants? These questions require thoughtful analysis and consistent processes that can withstand regulatory scrutiny.
Fee Transparency and Reasonableness
The reasonableness of plan fees has become an area of intense focus for regulators and a frequent source of litigation. As a fiduciary, you must understand all fees being charged to the plan and its participants, including investment management fees, administrative fees, and any revenue sharing arrangements. You’re also responsible for ensuring these fees are reasonable in relation to the services provided.
The complexity increases when you consider that fees can be structured in various ways, such as direct charges, asset-based fees, or indirect compensation through revenue sharing. Many plan sponsors find themselves unprepared to evaluate the reasonableness of their fee structure or to negotiate with service providers effectively. Documentation of your fee review process is essential to demonstrating that you’ve fulfilled your fiduciary obligations.
Compliance and Administrative Burdens
Beyond investment and fee oversight, plan sponsors must navigate a labyrinth of compliance requirements. These include timely deposit of employee deferrals, proper handling of loans and distributions, adherence to contribution limits, satisfaction of nondiscrimination testing requirements, and accurate reporting to government agencies. Each of these areas is governed by detailed regulations with specific deadlines and procedures.
The consequences of administrative errors can be severe, ranging from plan disqualification to personal liability for fiduciaries. Even well-intentioned sponsors can find themselves in violation of technical requirements they didn’t fully understand. This is where many companies recognize the need for specialized expertise to support their internal capabilities.
The Critical Role of Independent Audits
For plans with 100 or more eligible participants at the beginning of the plan year, an annual independent audit is not optional—it’s a legal requirement. This audit, conducted by a qualified independent public accountant, serves as a crucial safeguard for both plan participants and fiduciaries.
The employee benefit plan audit examines whether the plan’s financial statements are presented fairly and in accordance with generally accepted accounting principles. More importantly for fiduciaries, it tests whether the plan is operating in compliance with its governing documents and applicable regulations. The audit can identify issues with contribution calculations, eligibility determinations, benefit payments, prohibited transactions, and party-in-interest relationships before they escalate into significant problems.
Many plan sponsors underestimate the complexity of these audits. Employee benefit plan auditing is a specialized practice area that requires specific expertise and credentials. The audit isn’t merely a review of financial records—it involves testing participant data, examining plan operations, evaluating internal controls, and assessing compliance with ERISA requirements. The auditor serves as an independent check on plan operations and can provide valuable insights into areas where fiduciary risk may be elevated.
Proactive Risk Management
Given the complexity of fiduciary responsibilities and the potential for personal liability, successful plan sponsors adopt a proactive approach to risk management. This includes establishing a plan governance committee with clearly defined responsibilities, documenting all fiduciary decisions and the process used to reach them, conducting regular benchmarking of plan investments and fees, obtaining fiduciary liability insurance, and engaging qualified advisors to support areas where internal expertise is limited.
The importance of documentation cannot be overstated. When fiduciary decisions are challenged, regulators and courts look for evidence of a prudent process. Even if a decision ultimately doesn’t work out as hoped, demonstrating that you followed a thoughtful, well-documented process can provide substantial protection.
When to Seek Professional Guidance
While some companies have the internal resources to handle many aspects of plan administration, most benefit from professional support in key areas. A qualified CPA firm with expertise in employee benefit plans can provide invaluable assistance with the required annual audit, guidance on compliance issues, and objective assessment of your fiduciary practices.
The relationship between plan sponsors and their auditors should be viewed as a partnership in protecting participant interests and managing fiduciary risk. Your auditor brings specialized knowledge of ERISA requirements, experience with best practices from other plans, and an independent perspective that can identify issues before they become problems.
Moving Forward with Confidence
Sponsoring a 401(k) plan is a significant responsibility that shouldn’t be taken lightly, but it doesn’t have to be overwhelming. By understanding your fiduciary obligations, implementing strong governance practices, maintaining thorough documentation, and engaging qualified professionals where needed, you can fulfill your duties while providing a valuable benefit to your employees.
___________________
About Herod CPA PLLC
Herod CPA PLLC provides specialized employee benefit plan audit services to help plan sponsors and administrators meet their fiduciary responsibilities with confidence.
Contact us at info@herod.cpa or follow us on LinkedIn for more information.