WHAT PEOS SHOULD KNOW ABOUT 401(K) PLANS

If your PEO offers a 401(k) plan, it’s important to understand that your company has significant obligations as a fiduciary. This means you’re responsible for making sure the plan is managed properly and that your clients’ employees’ retirement savings are protected.

According to the Employee Retirement Income Security Act of 1974 (ERISA), you’re required to act in the best interest of plan participants, keep costs reasonable, diversify investments, follow the plan’s rules, and manage everything carefully. The main risks of not following these steps include lawsuits, Department of Labor fines, and personal liability claims.

You’ll likely work with various service providers like investment advisors, third-party administrators, recordkeepers, and custodians. Each has a specific role, so it’s important to understand who does what and whether they share any fiduciary duties with you.

INVESTMENT ADVISORS

Investment Advisors are professionals who provide guidance on the selection and monitoring of investment options within the plan. They help the fiduciaries make informed decisions about the plan’s investment lineup, ensuring diversification and alignment with participants’ best interests. Investment advisors often share fiduciary responsibilities, meaning they must act prudently and loyally on behalf of plan participants. There are two types:

ERISA 3(21) Fiduciaries are investment advisors who provide investment advice to the plan and have discretionary authority to make recommendations, but the ultimate decision-making authority remains with the plan sponsor or committee. This role involves a shared fiduciary responsibility, where the plan sponsor retains control but relies on the advisor’s expertise.

ERISA 3(38) Investment Managers are discretionary investment managers who have full authority and responsibility to select, monitor, and replace plan investments without needing the plan sponsor’s approval for each decision. This role relieves the plan sponsor of fiduciary liability for investment decisions, as the 3(38) fiduciary assumes full responsibility.

THIRD-PARTY ADMINISTRATORS

Third-party administrators (TPAs) manage the day-to-day administrative tasks of the 401(k) plan. This includes processing contributions, distributions, loans, and ensuring compliance with IRS and Department of Labor regulations. TPAs prepare necessary filings such as Form 5500 and assist with nondiscrimination testing to maintain the plan’s qualified status. While TPAs typically do not have fiduciary duties, their accuracy and timeliness are vital to the plan’s smooth operation.

ERISA 3(16) PLAN ADMINISTRATORS

ERISA 3(16) plan administrators are named fiduciaries responsible for all plan administrative functions, including hiring and monitoring other service providers ensuring compliance with ERISA and IRS rules, sending required notices to participants, reviewing and approving filings, and processing plan transactions like loans and distributions. Delegating these duties to a third-party 3(16) administrator can reduce the plan sponsor’s administrative burden and shift some liability.

RECORDKEEPERS

Recordkeepers maintain detailed records of participant accounts, track transactions, and provide statements to participants. They ensure that contributions are properly allocated and that account balances are accurate. Recordkeepers also facilitate participant access to their accounts through online portals and customer service. Their role is essential for transparency and participant engagement.

CUSTODIANS

Custodians or trustees are responsible for holding the plan’s assets securely. They safeguard the funds and ensure that investment transactions are executed correctly. Custodians maintain the integrity of the plan’s assets and provide regular reporting to fiduciaries.

Collaboration among these providers creates a system of checks and balances that helps mitigate risks and ensures regulatory compliance. PEOs should carefully select and regularly review these service providers, clearly define their roles in written agreements to uphold fiduciary standards and protect plan participants.

To keep things running smoothly and reduce risk, it’s a good idea to set up a retirement plan committee, create clear documents outlining responsibilities and investment choices, regularly review investments, make sure that fees are reasonable, and keep thorough records. Also, don’t forget to train your team on fiduciary duties, review cybersecurity measures, and consider insurance to protect against legal claims. It’s especially important to keep detailed documentation of all processes and procedures, including quarterly retirement plan committee meetings with your advisor. Oftentimes investment advisors assist with these items as part of their services.

By following these steps and collaborating with the right firms, you’re taking steps to help manage the 401(k) plan responsibly and protect both the company and senior management.