401(k) Plans: Make Sure You Know the Players
With the continued discussion in Congress over responsibilities of divulging and monitoring 401(K) plan fees and expenses, one can lose sight of who has the responsibility for checking and who is actually a "fiduciary" for the plan. Before the new rules are laid out, let's consider some of the key players in the process.
"Plan Sponsor." This is the entity creating the plan. It can be a company, a Board of Directors of a company or some other governing body, but ultimately this entity is the number 1 fiduciary of the plan. It will be assumed that the plan sponsor has a fiduciary role, that is to "exercise discretionary authority over the plan assets." Participants may direct their investments, but the plan sponsor is the entity who chooses the investment options and controls the cost. Fiduciary? Yes.
"Plan Administrator." This is the person or entity that controls and manages the plan. Fiduciary functions may be delegated to others, but the Plan Administrator ultimately retains control over the plan. The Plan Sponsor can act as the Administrator, or it can be a retained service provider. But since it controls the assets, it has discretionary authority. Fiduciary? Yes.
"Plan Trustee." A Trustee holds, invests and pays plan assets. If the trustee is empowered with authority to make discretionary decisions, it can be a fiduciary. But often times a Trustee is merely empowered to act under the direction of the plan administrator or another fiduciary. If the Trustee has no independent authority and can only act by direction, there may not be fiduciary status. Fiduciary? Maybe.
"Plan Investment Committee." If an investment committee is established for the plan, the committee acts to make investments within the investment program established by the sponsor or administrator. For example, the administrator may approve investment into a certain class of funds, but the committee chooses the actual funds that will be offered. Because the investment committee should only be making recommendations to the administrator or the sponsor, it is not directly controlling plan assets. Fiduciary? Probably not.
"Investment Manager." This person or entity is given specific investment instructions from the sponsor or administrator regarding authority to make investments. The manager may not exercise its own judgment but should only act on the instructions given to it. Fiduciary? Probably not.
"Investment Advisor." This person or entity provides investment advice to the plan administrator, the investment committee or the sponsor regarding selection of investment options. The can also recommend managers or other professions. However, the advisor should not actually have control over making investments or use of plan assets. Fiduciary? Probably not.
It is important to understand that what makes someone a "fiduciary" is the exercise of discretionary authority over plan assets. So "probably not" can be replaced by "yes" when any person or entity makes its own decision over plan assets. Some entities will be fiduciaries for some actions and not for others. Fiduciary status can be given or taken away depending on the need of the plan. But it is important to recognize that the fiduciary responsibility for providing information to participants has to be satisfied. Responsibility travels up, not down. So plan sponsors who are fiduciaries are ultimately responsible for making sure those persons or entities designated to provide information (or to manage and disclose fees) are doing their jobs.
The key to understanding some of the players is recognizing who has what job. If anyone below the sponsor or administrator drops the ball in their responsibilities, the sponsor and administrator is obligated to pick it up and fix it. I recommend that employers and plan sponsors stop and make a list of all the players on their 401(k) team and list out their job functions. Then, check regularly to make sure the jobs are being done properly.
