Small Business Retirement/401(k) Plan: What is Your Liability?

As an employer, evaluating small business retirement plan options can be overwhelming. However, providing a retirement or 401(k) plan to your employees can assist them with retirement savings and attract and retain top talent within your organization. Despite the benefits, it’s important to understand your liability as the plan sponsor.

When sponsoring a small business retirement plan, employers have fiduciary liability, which comes with a high level of responsibility for the plan. And the laws and penalties associated with retirement plan liability have gotten stricter over the years.

What is a fiduciary?

The Employee Retirement Income Security Act (ERISA) states that a person is a 401(k) fiduciary “to the extent that he exercises discretionary control or authority over plan management or authority or control over management or disposition of plan assets, renders investment advice regarding plan assets for a fee, or has discretionary authority or responsibility in plan administration.”

The fiduciary hierarchy is something all employers who maintain 401(k) liability should be familiar with. This is applicable to all 401(k) plans and includes both fiduciary and non-fiduciary roles. Employers must monitor their plan providers, so they should seek those that are easily monitored, with transparent fees and services. Here’s what you need to know:

• ERISA section 402(a) Named Fiduciary: This is usually the ERISA section 3(16) Plan Administrator and has the overall authority to control and manage the operation and administration of the plan.

• ERISA section 3(16) Plan Administrator: Person designated in the plan document. The employer is the default, and is responsible for any fiduciary responsibility not assumed by the ERISA section 403(a) Trustee.

• ERISA section 403(a) Trustee: Named in a 401(k) plan with exclusive authority and discretion to manage and control plan assets.

• ERISA section 3(38) “Investment Manager”: Financial advisor that assumes sole fiduciary liability for investment selection and monitoring. Must be a bank, insurance company or RIA subject to the Investment Advisers Act of 1940.

• ERISA section 403(a)(1) “Directed Trustee”: Lacks the discretion of a full Trustee. They hold plan assets but do not control them, and are subject to the direction of the Named fiduciary in accordance with the terms of the plan document and ERISA.

• Recordkeeper: They are responsible for tracking contributions, earnings and investments on a participant-level, and for directing the Directed Trustee to execute trades as requested by plan participants.

• Third-Party Administrator (TPA): Responsible for annual ERISA compliance.

• Financial Advisors: Financial professionals that render investment advice for a fee. They are not a 3(38) Investment Manager. Investment advisers are held to a fiduciary standard which requires them to act in the best interest of 401(k) plan participants. They are paid a flat fee regardless of advice. There are other types of advisors which do not operate under a set of standards, and often operate when a conflict of interest is in play. Their compensation varies based on the type of advice given.

• Custodian: Similar to a Directed Trustee. They hold plan assets but do not have any discretionary authority.

Employers have certain fiduciary responsibilities to meet. Some of these include paying only reasonable expenses from plan assets; depositing employee contributions in a timely manner; maintaining adequate ERISA fidelity bond coverage and selecting competent service providers to monitor 401(k) plans. Employers that do not meet these responsibilities risk personal liability and can be subject to lawsuits and other consequences.

Utilizing the services of a professional employer organization (PEO) can help protect you from personal liability. As a plan co-sponsor, your PEO partner will take on the liability and the burden of fiduciary responsibility. To learn more about PEO retirement and 401(k) plan options, discover PRemployer and what we can do for you and your small business.