401(k) plan best practices: A plan sponsor’s 2024 fiduciary checklist

The ominous “F word” has been part of the DC plan vernacular for decades. It can be complicated and even a little scary. The fiduciary concept is such an integral part of the retirement plan space that the Department of Labor continues to try to refine and clarify its fiduciary rule. The latest iteration of the rule was sent to the Office of Management and Budget for review last month and is expected to be released this spring.

While uncertainty swirls around the fiduciary landscape, it is important to stay up to speed on the ins and outs of being a fiduciary. ERISA defines the basic fundamentals of being a fiduciary, and Donovan v. Bierwirth, decided in 1982, established that the fiduciary duty is the highest duty known to law. Retirement plan fiduciaries are making decisions that affect plan participants’ retirement savings, and for many participants, it is the largest sum of money they will ever see, said Jonathan Young, senior national accounts manager at Capital Group. Young outlined the basics of fiduciary responsibilities and best practices in a recent webinar.

Who is a fiduciary?

In the DC plan space, a fiduciary is anyone who exercises discretionary authority or control over the plan itself, the plan assets, anyone who gives investment advice to the plan for a fee, the plan administrator, the committee and the investment advisor. ERISA outlines the various fiduciary roles, including:

– 402(a) named fiduciary. This is the primary person who oversees the selection and monitoring of all other plan fiduciaries and assumes most of the plan sponsor duties.

– 3(16) plan administrator. This person takes on the day-to-day operation of the plan.

– 403(a) trustee or the 403(a)(1) directed trustee. This person has exclusive authority and discretion to manage and control the plan assets. For smaller companies, the trustee often is the owner of the company, while larger companies frequently appoint a directed trustee who answers to the fiduciary committee.

– 3(38) investment manager. This is typically a registered investment advisor who has discretion over the plan investment options.

– 3(21) investment advisor. This is someone who makes recommendations to the committee but has no discretion.

What is required of a fiduciary?

There are three requirements fiduciaries must follow.

1. Exclusive Benefit. Plan sponsors must look out for the exclusive benefit of plan participants and their beneficiaries. They cannot look out for their own interests, the company’s interests or even the interests of other employees. “You only worry about the participants of the plan, and sometimes that makes it challenging,” said Young. “We’ve all heard stories of plan sponsors making decisions out of litigation fear. If you’re concerned about getting sued, I would argue that is self-interest and likely a breach of fiduciary duty.” Young emphasized that not all decisions that involve a plan are fiduciary decisions. Whether to establish a plan, amend a plan or terminate a plan as well as which plan features to include are all business decisions, not fiduciary decisions, and therefore do not fall under ERISA, said Young. It is only when someone acts on behalf of the plan to implement those decisions that fiduciary requirements come into play. Furthermore, choosing the lowest cost option for plan expenses is not a fiduciary safe harbor, said Young. He noted ERISA requires fiduciaries to pay no more than what is reasonable in fees, but it never directs fiduciaries to choose the lowest-cost or cheapest option.
2. Prudent Expert Rule. This rule requires fiduciaries to make decisions for participants with the care, skill, prudence and diligence that a prudent expert would. Prudent decisions require appropriate knowledge, experience and expertise, said Young. Anyone who is in a fiduciary role who does not have that knowledge, experience and expertise needs to find somebody who is appropriately knowledgeable to help with fiduciary decisions. It is important to remember that even when services are contracted out,  the named fiduciary continues to have the obligation to prudently monitor providers who carry out fiduciary tasks. “The question often comes up, how do you avoid fiduciary responsibility and fiduciary liability?” noted Young. “The answer is you can’t. Service providers can and do take on fiduciary responsibility, and it can certainly lessen a plan sponsor’s fiduciary burden, but it never – I want to repeat never –  goes away. A fiduciary who fails to meet their responsibility when selecting, when hiring, when monitoring their service providers, may very well end up liable for any of the failings of those hired service providers.”
3. Investment diversification. “We’ve heard this from our parents, grandparents, some of us, maybe even our great-grandparents: Don’t put all your eggs in one basket. That’s simply what the Department of Labor has told us here,” said Young. Plans can include several options such as stocks, bonds and cash alternatives, and plan sponsors must educate participants about their options. One caveat is 404(c) self-directed investments that offer some protection for fiduciaries if participants lose money as long as they provide the proper notifications to those participants. While it’s not a requirement, it may be a best practice to simplify investment menus to avoid overwhelming participants, said Young. The largest retirement plan in the country, the Federal Employee Retirement Savings Plan (FERS), offers just five distinct investment options plus a target-date series, he said.

Related: Retirement trade group urges feds to stop DOL fiduciary rule, pass 33 proposals

Fiduciary best practices

There are several best practices that plan sponsors can follow to protect participants and themselves:

• Draft policy. These include creating properly drafted policy statements, including policy statements for recordkeeping, education, cybersecurity and investment. However, Young cautions that everything put in writing becomes a plan document that is discoverable and admissible in court.
• Communicate, educate. Another best practice is around communication. Fiduciaries must educate their participants about the plan and investments. Written notices will suffice but are a bare minimum and traditional education is not that successful, so thoughtful and creative approaches to education are desirable. “The more engaged the plan sponsor, the more engaged the participant and the greater likelihood of improving participant outcomes,” said Young. “It’s incredibly important that we lean into this idea of engagement.”
• Reach out to missing participants. Communication extends to missing participants, who remain in a plan after separating from a company. The plan sponsor’s fiduciary responsibility remains, so it is important to take steps to keep in touch with employees even if they leave or retire by collecting personal contact information while they are still employed.
• Choose plan committee carefully. When forming a plan committee, choose members who take their responsibility seriously, determine what role each committee member will play, and prioritize including people who have some knowledge of ERISA, recordkeeping and investments. If they don’t have that knowledge, educate them. Codify the roles and responsibilities of the committee in a written charter, but consider building flexibility into all written statements.