401(k)ology – Plan Governance: Plan Sponsor vs. Fiduciary and Committee Roles and Responsibilities
Published July 25, 2024
Increasingly frequently, we are asked who has the responsibility for specific retirement plan oversight. Depending on the size of your company, who is responsible may be just the owner of a small business or there may be specific teams or committees assigned to tasks in larger entities. Certain parties will inevitably wear multiple hats, acting on behalf of the employer (settlor functions) and on behalf of the plan as a fiduciary. The roles of the plan sponsor and of the plan fiduciaries can be hard to distinguish and, in certain functions, can overlap. In this blog, we will help you decipher just who is responsible for what so that an effective governance structure can be developed and maintained.
Retirement plan governance under the Employee Retirement Income Security Act (ERISA) is a critical aspect of ensuring that employee benefit plans, including 401(k) and other retirement plans, are managed and administered in a manner that protects the interests of plan participants and beneficiaries. Retirement plan compliance has become more complex since the passing of ERISA in 1974 and, as a result, plan oversight and the delegation of duties are key in operating and maintaining a compliant program. ERISA and its implementing regulations provide guidance for plan sponsors, outline fiduciary responsibilities, and require that employees be provided with sufficient information about the plan and funding.
Operating a successful retirement plan program typically involves multiple parties including the plan sponsor and various service providers, all of whom have distinct roles and responsibilities with respect to the plan. The relationship between all who owe responsibility to the plan is hierarchical. This hierarchy of plan oversight is illustrated below.
At the helm of everything related to the retirement plan is the Employer, who is also in most cases the Plan Sponsor. The employer may be overseen by a board of directors, officers or owners depending on the size and nature of the business. The Employer may designate fiduciaries, establish plan committees and designate a Plan Administrator (although it is most common for the Employer to also be the named Plan Administrator). Those who have been delegated certain authority may utilize other resources (HR staff, payroll providers, third-party service providers, advisors, CPAs, legal counsel and recordkeepers) to assist in carrying out the specific duties which they have been delegated.
Practice Note: The plan “administrator” under ERISA §3(16) has a central role in the operation and administration of a retirement plan discussed below; however, the role is often confused with “third-party administrator” or “TPA”, which is a service provider the §3(16) Plan Administrator engages to assist in preparing plan documents, governmental filings, nondiscrimination testing and required participant disclosures and statements. In other words, TPAs rarely serve as the ERISA §3(16) plan administrator—that role is almost always occupied solely by the employer. Employers sponsoring a single employer plan are the default ERISA “plan sponsor” and the default ERISA plan “administrator.” The DOL has confirmed that the ERISA plan administrator role is always a fiduciary position by the nature and responsibilities of its position.
Plan Roles & Responsibilities
Employer (includes related employers who participate in the plan)
Plan Sponsor: The employer acts as the plan sponsor, establishing and maintaining the retirement plan. The employer is responsible for the overall design of the plan, including the determination of benefit levels, eligibility criteria, and other plan features.
Compliance: The employer must ensure that the plan complies with ERISA and the Internal Revenue Code, their implementing regulations, and all other applicable laws.
Funding: The employer is responsible for making contributions to the plan, as specified in the plan documents, and ensuring that these contributions are made in a timely manner.
Selection of Fiduciaries: The employer selects individuals, committees, or other entities to serve as fiduciaries, who will manage and control the operation and administration of the plan.
Types of Plan Fiduciaries
Named Trustees/Fiduciaries: These individuals or entities are explicitly named in the plan document and have overall responsibility for the plan’s operation and administration (aka the ERISA §402(a) named fiduciary).
Plan Administrator: This fiduciary is responsible for the day-to-day administration of the plan, ensuring that it operates in accordance with the plan documents and ERISA requirements (aka the ERISA §3(16) Plan Administrator).
Investment Advisor: An investment advisor does not have discretionary authority over the plan’s investments, although an investment advisor provides advice for a fee and is considered a fiduciary with respect to the plan (aka ERISA §3(21) investment advisor).
Investment Manager: If appointed, the investment manager has discretionary authority over the plan's investments and must manage the assets prudently and in accordance with the plan’s investment policy statement (aka ERISA §3(38) investment manager).
Plan Administrator
As noted above, Plan Administrators are fiduciaries and are responsible for the vast majority of the day-to-day operation and administration of the plan. Unless designated otherwise, the Employer/Plan Sponsor is also the Plan Administrator whose delegated responsibilities include:
Plan Documentation and Compliance: Maintaining Plan Documents, Implementing Amendments, and Compliance with ERISA, the Internal Revenue Code, and other applicable laws
Disclosure and Reporting: Provide Participant Disclosures including Summary Plan Description (SPD) and Summary Annual Report (SAR) and Government Filings: Form 5500, Form 8955-SSA
Participant Communication and Education: Benefit Statements and Response to Participant Inquiries
Plan Operations and Administration: Eligibility and Enrollment, Distributions to Participants, and Recordkeeping of plan activities, participant information, and financial transactions
Service Provider Management: Selection and Monitoring of service providers, Reviewing and ensuring the reasonableness of fees charged by service providers and disclosing these fees to participants as required
Fiduciary Duties
Plan fiduciaries have a legal obligation to act solely in the interest of plan participants and beneficiaries. The core four ERISA fiduciary duties are:
Duty of Loyalty (aka the “Exclusive Benefit Rule”): Operating the plan for the exclusive purpose of providing benefits to participants, defraying reasonable plan expenses and avoiding conflicts of interest. Acting with complete an undivided loyalty to the participants and beneficiaries, and ensuring decisions are made with an “eye single” to those interests.
Duty of Prudence: Acting with the care, skill, prudence, and diligence that a prudent person would use in a similar situation. This includes the duty to prudently select and monitor plan service providers (e.g., TPAs, recordkeepers) with an appropriate method based on the facts and circumstances. DOL guidance suggests the duty is better viewed as a prudent “expert” standard in situations requiring specialized knowledge and expertise, such as when selecting and monitoring the plan’s designated investment alternatives (e.g., mutual funds).
Duty to Diversify: Offering a diverse lineup of investments to minimize risk.
Duty to Follow Plan Documents: Administering the plan in accordance with the terms of the plan document and other materials governing the plan as long as they are consistent with ERISA (includes investment agreements, investment policy statement, etc.).
Fiduciaries are held to high standards of conduct and can be held personally liable for any breaches of their fiduciary duties. They must ensure that their actions are for the exclusive purpose of providing benefits to participants. These fiduciary duties are commonly described by courts as “the highest known to the law.”
Plan Committees – Fiduciary Functions vs. Employer (Settlor Functions)
There are four distinct settlor functions that are not subject to the fiduciary requirements of ERISA:
Establishment of a plan
Determining which employees will be eligible to participate in the plan
Determining what types and levels of employer contributions will be provided
Terminating the plan
As you may have guessed, that means that everything else generally IS subject to ERISA’s fiduciary standards. Furthermore, any activities undertaken to implement one of these settlor functions generally is fiduciary in nature and must be carried out with the fiduciary responsibility provisions described above.
Below is a sample of common items that are the responsibility of either the Employer or the Fiduciary.
Some functions of the plan will require both the employer and the committee/fiduciaries. For example, the decision as to who pays specific plan related expenses will involve the employer, if the employer will directly pay for plan related expenses and/or the committee if plan related expenses will be paid from plan assets. Anything involving plan assets will be a fiduciary function.
To summarize: Settlor functions include activities related to the formation and amendment (rather than administration or management) of the plan, and such functions are not within the scope of ERISA’s fiduciary obligations. For example, employers are not bound to a best interest fiduciary standard when amending the plan to reduce benefits. However, all other functions generally are subject to the fiduciary standard.
Plan Governance
Effective governance requires clear delineation of roles and responsibilities, regular training for fiduciaries on their duties and obligations, and robust processes for monitoring and overseeing plan operations. Employers should consider establishing committees, such as a retirement plan committee, to oversee plan governance, ensure compliance, and monitor the performance of plan service providers.
The key to a successful plan governance structure is communication between all of the parties on a regular basis and establishing policies and procedures for plan operation. If more than one committee is established, there should be some overlap of members. For example, if an employer delegates an investment committee separate from an administrative committee there should be at least one member who sits on both committees. Committees should ensure there is clear documentation of their meetings, areas of analysis, and decisions through detailed meeting minutes.
How Newfront Retirement Services Assists with Plan Governance
Retirement plan governance under ERISA involves a collaborative effort between the employer and plan fiduciaries to ensure the plan operates in the best interests of participants. Employers set up and maintain the plan, while fiduciaries manage the plan with a high standard of care and diligence. Proper governance structures, adherence to ERISA regulations, and prudent management practices are essential to safeguard participants' retirement benefits.
Our team of investment professionals and subject matter experts provides employers and fiduciaries with the support needed to maintain a successful governance program. We support the plan committees with investment monitoring, Investment Policy Statements, regular meetings, proper documentation, and benchmarking. In addition, we provide the employer support with ERISA compliance, vendor marketing and negotiations, plan design and implementation.
At Newfront Retirement Services, we believe regular training for fiduciaries on their duties and obligations and support in monitoring and overseeing plan operations are critical components of an effective plan governance structure. In the current landscape of ERISA litigation, the best defense is a great offense!
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