What Hat Are You Wearing?
Last Updated: October 03, 2018
In today’s organizations, many employees are asked to take on multiple roles and responsibilities. This is especially true when considering the management of a corporate retirement plan. To better understand what role each person plays in the management of a 401(k) (or any other corporate retirement plan), we have to understand what roles there are to play.
There are three major players in the game of retirement plan management: The Settlor, The Plan Fiduciary, and The Day-to-Day Administrator. Each of those roles has a different set of responsibilities and makes decisions based on specific criteria.
It’s important to note that the following characteristics describe roles and responsibilities, not job titles. It’s possible (and common) for one person to bear the responsibilities of multiple roles, in addition to their regular job duties.
But what hat should you be wearing for each decision? And what happens when you have to wear more than one hat?
First, meet the Plan Sponsor: The plan sponsor, the organization or employer who chooses to offer a plan, typically bears the responsibilities of a named plan fiduciary as described above. However, the plan sponsor is also responsible to make non-fiduciary decisions. As you’ll see, the Plan Sponsor factors into each of the following roles.
Now, let’s take a look at each role.
Settlor (the Plan Sponsor)
Primary responsibility: The Settlor makes business decisions about the design of the plan.
Fiduciary responsibility: No.
Settlor decisions are key decisions about how the plan will be structured, and what impact the plan will have financially on the company. These decisions about plan design are not considered fiduciary decisions, so the plan sponsor is free to consider the impact on the company as well as on the plan participants and make decisions that make good business sense. These decisions also don’t carry the liability that fiduciary decisions carry.
Settlor decisions include:
- The type of plan offered and its options
- Changing or eliminating plan options
- Requiring, or changing the level of, employee contributions
- Terminating all, or part, of a plan
In many organizations, tension exists between the desire to make plan decisions that benefit the participants and the plan sponsor/settlor’s desire to minimize costs to the company. This is especially evident when the roles of settlor and fiduciary are taken on by one individual.
Primary Responsibility: The Fiduciary ensures that the implementation and management of the plan are in compliance with the Employee Retirement Income Security Act of 1974 (ERISA), and the best interest of the plan’s participants and their beneficiaries.
Fiduciary responsibility: Yes.
Plan fiduciaries are responsible for making sure that the retirement plan serves the best interests of the participants and their beneficiaries. They are also responsible for ensuring that all plan documents are followed and compliant with ERISA, for diversifying plan investments, and for guarding against unreasonable plan expenses and unnecessary services.
Fiduciaries manage many transactional aspects of the plan, including making investment decisions, ensuring that employee contributions are deposited in a timely manner, and hiring third-party service providers. Some company fiduciaries choose to take these responsibilities on themselves, and others hire advisors – who share or take over the fiduciary liability– to help with those decisions.
To properly manage these elements, fiduciaries need confidence that the plan they’re providing is truly operating for the benefit of participants. That confidence comes from a clear perspective on the investment performance, vendor fees, and employee retirement readiness associated with the plan, gained through clear and easy-to-understand reports from all service providers engaged.
Decisions made by fiduciaries – and co-fiduciaries, when they are hired by company fiduciaries – are held to a legal standard under The Employee Retirement Income Security Act of 1974 (ERISA), which makes many stipulations as to how retirement plans are managed and who is responsible for management. Failure to comply with ERISA regulations when acting as a fiduciary can carry consequences ranging from monetary fines to jail time for violators. Liability under ERISA extends to the individual fiduciary and their individual assets. These legal standards further increase the pressure on those bearing fiduciary responsibility.
Who is a fiduciary?
Anyone who exercises discretionary authority or responsibility about the administration of the plan, or management of the plan assets, is a fiduciary (whether or not they realize it, or officially accept the responsibility). There are many individuals within an organization that may carry this responsibility, and they serve in diverse areas of responsibility within their companies. Each also brings a perspective specific to their primary job role that informs how they carry out the specific tasks related to their fiduciary responsibility.
Every plan must have a named fiduciary identified in the plan document. Designated by office, or by name, the named fiduciary is any person, corporation, or committee specifically noted as having fiduciary responsibility. For many plans, the plan sponsor is the named fiduciary, which increases liability risk for the company. Some plans delegate a retirement plan committee to manage fiduciary decisions. Plan documents should clearly assign roles and responsibilities.
The named fiduciary has the authority to appoint others to assist with both fiduciary and non-fiduciary tasks. This appointment is often allowed within the plan document and can be made at the named fiduciary’s discretion.
The responsibilities of the named fiduciary include all of the duties listed under ERISA:
- Acting solely in the interest of plan participants and their beneficiaries, and only with the intent of providing benefits to them
- Carrying out their duties in the same way that someone who is informed and understands retirement plans would (this is one of the primary reasons fiduciaries hire advisors)
- Following all plan documents, as long as those documents are compliant with ERISA guidelines
- Diversifying plan investments
- Ensuring that the plan only pays reasonable expenses.
The named fiduciary also has the added responsibility of delegating responsibilities (both fiduciary and non-fiduciary) as necessary to administrators, trustees, advisors, etc.
Any person who makes discretionary decisions about plan administration or asset management, or who gives investment advice regarding the plan assets in exchange for a fee, is considered a functional fiduciary, and is obligated to act as such. These people may be named in the plan documents, assigned by the named fiduciary, or voluntarily take on responsibilities that require them to use the discretionary authority that is the hallmark of a fiduciary task.
Some individuals may accidentally step into a role as a functional fiduciary by making a discretionary decision. For example: a staff member who makes a discretionary decision to correct a plan error is acting in a fiduciary capacity and is legally responsible for that decision and its outcomes.
Primary responsibility: The role of the Plan Administrator is to ensure that the plan is administered according to the regulations of the Pension Benefits Act and the plan design documents.
Fiduciary responsibility. Yes.
The role of the plan’s Administrator is to ensure that the plan is administered according to the regulations of the Pension Benefits Act and the plan design documents. The plan administrator is ultimately responsible for making sure the plan is carried out according to all appropriate regulations and documentation. The role may be designated in the plan documents (even assigned to the named fiduciary), or be assigned by the named fiduciary. If the plan document is silent on the subject, the plan sponsor is the plan administrator.
But here’s the thing: The responsibilities of plan administration are BOTH fiduciary and non-fiduciary in nature.
The fiduciary tasks assigned to the Plan Administrator include:
- Authorization of distributions, loans, or plan transactions
- Selection or monitoring of investments
- The selection of plan service providers
- Interpretation or enforcement of the terms of the plan
- Decisions on claims of benefits
The administrative non-fiduciary responsibilities include:
- Participant eligibility
- Preparing participant communications
- Preparing drafts of filings and maintaining records
- Collecting and applying contributions
- Processing claims
- Participant orientation
- Plan benefit statements
- Making plan administration recommendations
The plan administrator may delegate any of the tasks above – to human resources, benefits, or finance staff members, or even to third-party service providers – but they are legally accountable for the work done. Additionally, anyone responsible for the aspects of administration that carry fiduciary responsibility is then considered a fiduciary to the extent that they exercise that discretionary authority.
How many hats do you wear?
In many organizations, the roles of plan management may overlap and people may be asked to wear more than one hat. There’s nothing wrong with that, in theory, as long as those who need to can switch mindsets when necessary. However, it can cause some tension when one is asked to take on both roles. For example, one employee or committee may be asked to make both settlor decisions (which impact the company) and plan fiduciary decisions (which must be in the best interest of the participants). In these situations, it can be incredibly helpful to have an advisor, or co-fiduciary, to help ensure that participants are well served.
We can help
If you’re looking for confidence that you are fulfilling your fiduciary responsibilities and that your plan is serving your employees well, we can help! There are a host of resources on this site about what it means to be a plan fiduciary.
If you want confidence that your retirement plan is preparing your employees for a successful retirement, we can help with that too! We’d love to unveil your plan’s performance – contact us at firstname.lastname@example.org.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.