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Understanding 401(k) Fiduciary Risk

If you have an existing retirement plan, do you know your 401(k) fiduciary obligations? Ask yourself the following questions:

1. Does your plan have an Investment Policy Statement (IPS)?

2. Have you reviewed the performance and fees of your 401(k) investment options in the past year?

3. Do you know if your plan is using the lowest-cost share class investments?

4. Does your plan include investment options from multiple mutual fund families?

5. Is all revenue sharing generated by your plan’s investments utilized to offset fees or allocated back to participants?

plan sponsor fiduciary responsibilities

If you answer “No” or “I don’t know” to any of these, then you may be subjecting yourself to increased 401(k) fiduciary risk.

Plan Sponsor 401(k) Fiduciary Obligations

Company retirement plans are subject to many regulations implemented by the Department of Labor (DOL) and the IRS. The most significant regulation relating to plans is the Employee Retirement Income Security Act of 1974, or ERISA.

Under ERISA, 401(k) fiduciaries, such as trustees, have legal responsibilities related to the plan. At a high level, these responsibilities include1:

• 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.

These responsibilities create risk for 401(k) plan fiduciaries if they aren’t properly carried out.

There are a number of ways to limit the liability associated with offering a 401(k) plan. The vast majority of 401(k) plans are set up so participants have control over their own investments. As long as this is done in accordance with ERISA standards, the plan sponsor and trustees don’t have liability for the investment choices and decisions made by individual participants. The trustees, however, do have responsibility for selecting and monitoring the investment options made available to the participants.

ERISA regulations also permit plan trustees to hire service providers to handle some or most of the 401(k) fiduciary functions and reduce their liability. Plan trustees still have fiduciary responsibility for overseeing the service providers, but not for the specific functions performed by the service providers.

1: From the DOL Publication “Meeting Your Fiduciary Responsibilities”

While LT Trust is not a Registered Investment Advisor, we can provide a list of referrals to help you alleviate your fiduciary responsibility.