What is a retirement plan sponsor?
If you’re a small business owner who offers, or has considered offering, a company-sponsored retirement plan to yourself or other employees, you’ve probably heard terms like plan sponsor, fiduciary responsibility, asset management, and the like thrown around. But you’re not a financial expert—you’re an entrepreneur, mechanic, chef, retailer, etc., and those terms can be confusing and overwhelming if you aren’t well-versed in the financial industry.
Luckily, we’re here to help. Let’s start with the basics.
How to know if you qualify as a retirement plan sponsor
A retirement plan sponsor is a company or employer that offers a retirement plan as a benefit to employees. As such, if you own a business or company that offers a 401(k) plan, for example, your business qualifies as a retirement plan sponsor. But what does that mean?
Essentially, it means you have a lot of responsibilities on your plate. Plan sponsors may be accountable for making important decisions to determine plan design, employee eligibility, and investment choices, and they may also be responsible for regularly updating and amending the plan. Plus, unless you hire a third-party fiduciary service to take on the fiduciary liability of the plan, you’ll be held to rigorous rules and regulations as a plan sponsor that may fall outside of your wheelhouse.
Is every plan sponsor a fiduciary?
There’s been a lot of recent chatter about who exactly qualifies as a retirement plan fiduciary, and there still seems to be quite a misconception surrounding fiduciaries. In fact, a 2016 survey conducted by Alliance Bernstein found that less than half of small retirement plan sponsors are aware that they’re a fiduciary .
But the reality is: every retirement plan sponsor is a fiduciary. And as a fiduciary, you’re required to act in the best interest of plan participants—which may mean outsourcing fiduciary responsibilities if you’re not an expert in running 401(k) plans.
How do I know if my 401(k) is fiduciary compliant?
As a 401(k) plan sponsor, you have a responsibility to remain complaint as a fiduciary—which means you have to make sure your 401(k) plan is operating correctly and is properly maintained. However, let’s be frank. You’re a business owner and not a retirement expert, so it can feel overwhelming when you come face-to-face with all the rules and regulations regarding retirement plans. But the consequence of a plan falling out of fiduciary compliance is a personal liability for any plan losses, so you still need to take the responsibility seriously.
How 401(k) plan sponsors can gauge fiduciary compliance
To avoid potential lawsuits or penalties down the road, you’ll want to regularly gauge fiduciary compliance. Start by asking yourself these questions:
Is there a system in place to document decisions made in regards to the plan and the plan investments?
Are those decisions made in the best interest of the plan participants/employees?
Is there a process in place to help educate employees on those decisions?
Do we have access to financial experts that can help with investment decisions?
Do employees have the information and opportunity to make knowledgeable decisions about saving for retirement?
Answering these questions will help you determine how compliant your fiduciary decisions are. It’s a lot of responsibility—and a lot of work.
Adding to the complexity of the issue is the Department of Labor’s proposed new fiduciary standard, which would require providers of investment advice or recommendations regarding a retirement account to serve the “best interests” of clients. The rule was originally supposed to go into effect way back in April 2017, but a series of delays pushed back full implementation until July 2019. And after the Fifth Circuit Court of Appeals vacated the rule in a 2-1 decision earlier this year, the regulation’s future is up in the air for the time being.
The proposed legislation’s next stop could be the Supreme Court, but the DOL has already gone on record stating that it will not be enforcing the 2016 fiduciary rule, pending further review . That being said, if by some miracle the new fiduciary standard passes through the Supreme Court, the relationship between plan sponsors and advisors will likely change dramatically. Contracts and services, among other things, would have to be restructured to comply with the “best interest” standard. Plan sponsors would have easy access to transparently view fees, and those who work with retirement plans and accounts—like brokers or insurance agents—would be held to a much higher standard. But for now, we can carry on with business as usual.
Why plan sponsors should choose a 401(k) plan that includes a 3(38) advisor
You’re the business owner; you love to have control. You’re excited to take on the fiduciary role for your 401(k) plan, but are you really the right person? Experts warn that you may want to think twice about that decision. The truth is, most plan sponsors lack the investment expertise to select or evaluate funds and run the risk of not knowing what they don’t know—something that could definitely turn into a liability down the road.
Differences between 3(21) and 3(38)
In the fiduciary world, there are an infinite number of unique product offerings that fall under two generalized categories: a 3(21) investment advisor and a 3(38) investment manager. A 3(21) investment advisor provides advice and recommendations on plan investments, but the plan sponsor retains the fiduciary responsibility for making the actual investment decisions. With a 3(38) investment manager, the investment manager—not the plan sponsor—assumes total responsibility for the investment lineup.
Plan sponsors will have greater responsibility and need to spend more time and effort to diligently perform investment functions using a 3(21) than they would have if this were outsourced to a 3(38). The nuances of a specific offering is often so complex that it can be difficult for 401(k) experts to differentiate.
What a sponsor needs and what a sponsor wants are often different. A lot of sponsors need a 3(38) to make the investment decisions but don’t want to lose control. Since investments are the more appealing part of 401(k) management, it’s often where sponsors feel they can make a difference. It makes the 401(k) meetings more interesting.
But plan sponsors need to delegate responsibilities if they are not equipped to prudently manage them. ERISA Section 404 notes that a fiduciary shall discharge their duties “with the care, skill, prudence, and diligence under circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in an enterprise of like character and with like aims.” That’s a lot of jargon, but the base message is simple—don’t bite off more than you can chew.
There’s a lot required of a small business owner who isn’t in the financial services industry. If a sponsor doesn’t have the skills, the function should be outsourced to someone who does have the necessary expertise.
Why a plan sponsor should choose a 401(k) plan that includes a 3(38) advisor
The amount of time it takes to create an investment policy and select and monitor fund lineups can be substantial. Business owners and other decision-makers will inevitably have many other things to do that are a higher priority than the investments. Letting someone else take the reins and responsibilities here makes a lot of sense.
Many business owners establish 401(k) plans included in a benefit package as a way to attract and retain talent, not because they want to manage one. The lack of expertise makes it very difficult to fulfill the fiduciary requirements under ERISA.
If time and expertise are lacking, a plan sponsor will be opening themselves up to potential liability for breaching fiduciary responsibility. Claims have recently been made against several firms in the financial services industry—if financial services companies can’t get this right, what are the odds of a small business owner getting it right without help?
Plan sponsor fiduciary responsibilities when working with a 3(21) or 3(38)
In addition to understanding the nuances of a particular 3(21) or 3(38) service, plan sponsors also need to be cognizant of the responsibilities that are not covered. Often, the plan sponsors retain responsibility for setting the investment policies (i.e. telling the investment fiduciary “how” to do their job), which will have a meaningful impact on the investments that are recommended or selected. To unknowing plan sponsors, this kind of under-the-radar responsibility can offset some or all of the benefits of using a fiduciary provider.
Current DOL rulings redefine the fiduciary
DOL efforts on the redefinition of “fiduciary” under ERISA §3(21) will most likely significantly expand the number of providers that are subject to a fiduciary standard of care for financial services. Some providers have agreed to transition non-fiduciary business to fiduciary business – either 3(21) or 3(38). Others have modified their agreements for non-fiduciary service to ensure that only non-fiduciary services are covered.
The biggest issue is that plan sponsors often lack the sophistication to understand the nuances of discretionary or non-discretionary advice, much less the potential ramifications of specific offerings under a “3(21)” or “3(38)” umbrella. There are good reasons to outsource fiduciary responsibilities, and any outsourced fiduciary offering, whether a 3(21) or a 3(38), can be extremely beneficial to plan sponsors.
Surviving year-end reporting as a plan sponsor
HELP! A plan sponsor's guide to surviving year end reporting
When the year begins winding down, it's time to start thinking about certain federally mandated responsibilities regarding your company’s 401(k) plan. To answer commonly-asked plan sponsor questions about year-end reporting, here’s the why, what, and how.
Why do plan sponsors need to file year end reports?
The Employee Retirement Income Security Act (ERISA) requires that sponsors of defined retirement contribution plans complete year-end reporting to make sure their plans meet federal qualification requirements, are compliant, and can legally maintain tax-exempt status.
What are plan sponsors required to report?
Year-end reporting revolves around plan sponsors annually collecting census and employer data including the number of participants, financial information about the assets held in the plan, and the service providers involved with the plan.
This data serves as the basis for several imperative plan-related tasks:
Making corrective distributions to pass the 401(k) discrimination test (meaning the plan does not discriminate in favor of highly compensated employees)
Completing the annual Form 5500 filing with the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS)
The accuracy of the census information cannot be overstated as it relates to these administrative functions. Carefully document and detail the following for each employee:
Relevant dates (birth/hire/termination/rehire/retirement)
Number of hours worked—even if they worked for only a portion of the year or don’t actively participate in the plan
How do plan sponsors complete year-end reporting?
Annual submissions consist of three reports, each covering specific plan areas to assure that contributions are allocated fairly to each eligible participant.
· Census List
The census list includes employee information such as birth, hire date, participation, termination date, and current employment status. This information is used to determine plan eligibility, plan entry dates, and participant status (active/inactive).
· Earnings, Deduction, and Benefit List
The earnings, deduction, and benefit list provides participant earnings, plan contributions, and hours worked. This information is used in compliance testing and for identifying highly compensated employees (HCEs) and key employees.
· Year-End Reporting Summary
The year-end reporting summary details owner- and company-related information to identify company owners and family members of owners who are employees, who will need to be coded as HCEs or key employees. Officers of the company may fall into one of these categories as well. Additionally, the year-end reporting summary will reveal if there are any controlled group issues.
In addition to this federal reporting, plan sponsors are also obligated to provide participants with a Summary Annual Report (SAR), which chronicles the plan’s annual return/report, and the Form 5500 that was filed with the federal government.
Help reporting 401(k) plan details
Given the potential volume and complexity of the information plan sponsors must collect and report, the IRS offers information for small businesses on the workings of 401(k) plans and reporting.
Partnering with PAi also simplifies reporting, as we’ve automated the process – no paper documents or unwieldy spreadsheets! Our online system has built-in checks and balances that alert us to nonconforming information, which we review and either take care of on the plan sponsor’s behalf or get them involved, if needed, for resolution.
You might also be interested in: What plan sponsors need to know about changing retirement plan providers
Questions about year-end reporting? You don't have to go it alone! Call us at 800-236-7400 or contact us online today.