Who & What is a Fiduciary? - Class 301

First of all, what exactly is a fiduciary and why is this role necessary for 401(k) Plans? A fiduciary is a person who acts on behalf of another, putting the plan participants’ interests ahead of their own. Fiduciaries are also both legally and ethically responsible to act in the participants’ best interests when designing and maintaining the retirement plan. Sounds simple, right? You'll see in this segment of the course that not all situations are black and white and how these decisions can be more complex than they initially seem.

One of the questions I hear when speaking with plan sponsors is “so, who exactly is a fiduciary on our 401(k) Plan?” The short answer is anyone who has an influence to make changes or affect the plan’s structure is considered a fiduciary. Now, this leads us to the concept of named fiduciaries and unnamed fiduciaries. Named fiduciaries are typically selected for the Investment Committee and/or serve as trustees on the plan. Likewise, a financial advisor would also be considered a named fiduciary to the plan as they have a formal role in overseeing the plan’s operations (please note that financial brokers are not fiduciaries to your plan). However, although your name may not appear in any of the plan’s documentation, you could still be considered an unnamed fiduciary to the retirement plan. An unnamed fiduciary could be, for example, an employee who sits on the 401(k) Investment Committee and votes on the motions to add and remove funds but their name does not appear on any documentation associated with the plan. Likewise, a member of the Human Resources team who expert knowledge of plan design and has the power to adjust the plan’s structure may be considered a fiduciary as their actions can directly impact the participants’ retirement outcomes. Although these people don’t have formal titles associated with the retirement plan, they are influencing the design of the program and, therefore, can be deemed unnamed fiduciaries.

So why do you need to know the role of a fiduciary for your retirement plan? First, fiduciaries do not only carry a responsibility to run the plan in accordance with the Prudent Man Standards but they also have certain liabilities associated with their role. As a fiduciary, you can be held personally liable for any losses incurred by the participants if you are found to be delinquent in your duties to oversee the plan (we'll get into these duties in more detail throughout this segment of the course). Second, in order to run the plan in the participants’ best interests first and all other parties second, you need to know the nuances of how a plan can be designed and built. Let's illustrate this point with an example.

If you joined us for Class 105 in our freshman year, you'll remember that the costs to sponsor a 401(k) Plan can be absorbed by the organization, by the participants, or a combination of the two. Now, this can be a tricky situation because what may be seen as a financial benefit to the organization could be also be seen as a financial detriment to the participants. Let's assume that you are setting up a new 401(k) Plan for your employees and the annual cost to sponsor the plan is $4,000/year. As an employer, you might say, “I don't want to pay those fees so I'll just have the employees pay them from their accounts.” Let's also assume that your participants collectively defer $40,000 into the 401(k) in their first year. In order for the plan provider to receive payment, they will debit the employees’ accounts $4,000 of the $40,000 total (also known as a 10% fee). Since this fee is way above industry standards, you would be putting the participants in a state of financial risk and, likewise, placing yourself in a position of fiduciary liability. In this situation, it would be advisable that the plan sponsor bears the cost of the plan to avoid passing on exorbitant investment fees to the participants until the plan balance grows. Later in this course, we'll discuss plan fees in more detail and when it is acceptable to transfer these cost to the participants’ accounts.

In the world of 401(k) Plans, the fiduciary process can be one of the more interesting and rewarding aspects of building a strong retirement benefit for the employees. This segment of the course will show you how to manage this process and which professionals can help steer you through these waters. Join us next week when we continue our junior year with our class on the responsibilities of 3(21) and 3(38) Advisors and how they can help protect the plan participants as well as the fiduciaries…