401(k) Fiduciary Duties and Responsibilities

First, let's define what a fiduciary is. A fiduciary is a person or entity with a legal and ethical obligation to act in the best interest of another party. For example, in a 401(k) plan, the fiduciary is the person or entity responsible for managing the plan and its investments. Several critical fiduciary duties and responsibilities are involved in managing a 401(k) plan. Here are a few of these duties.

Duty of Loyalty

The fiduciary must act solely in the best interest of the plan participants and beneficiaries, putting their interests ahead of their own. This duty requires fiduciaries to avoid conflicts of interest. Conflicts of interest come about when individuals have split interests. 

A typical example of a conflict of interest in a 401(k) plan is when people hire a financial advisor simply by their relationship with the sponsor. For example, choosing an advisor because he is your son-in-law is not a good enough reason.  

Duty of Prudence

Fiduciaries must act with the care, skill, prudence, and diligence that a prudent person would use in a similar situation. This duty requires fiduciaries to understand the investments offered in the plan, to monitor those investments, and to make changes when necessary to ensure they continue to be appropriate for the plan's participants.

At CUI Wealth Management, we always talk with clients about the importance of having a process. Choosing the right providers, investments, and plan design are all important. But the question should be, how did you come up with those decisions? What metrics have you used to evaluate and compare options?  

Duty to Diversify

Fiduciaries must diversify the plan's investments to minimize the risk of significant losses. This duty requires fiduciaries to offer various investment options to plan participants rather than relying on a single investment or asset class.

Make sure to distinguish this duty of diversification from the importance of selecting prudent investments. For example, sometimes plan fiduciaries put together a large selection of investment options without due diligence. They think the variety will excuse them of the obligation to careful selection.  

Pay Only Reasonable Plan Expenses

Fiduciaries must ensure the plan's expenses are reasonable and necessary. This duty requires fiduciaries to understand the plan's associated fees. Fees can erode participant assets over time. Costs are not bad, but you must justify the costs with an appropriate value.   

Knowing your retirement plan fees can help you benchmark and negotiate those fees. Our team at CUI Wealth Management helps our clients benchmark and negotiate provider fees. Providers are required to provide fee disclosures to participants and plan sponsors. Requesting and reviewing these documents is a great place to start.   

Following Plan Documents

401(k) plans allow for a lot of customization. However, retirement plans must follow their plan document and the provisions they adopt. For example, 401(k)s can adopt the option to allow loans. However, if your plan never adopted this provision, you cannot let participants take loans. If you need to change your plan design, consult your advisor and third-party administrator to understand your options.

In summary

Failure to fulfill your duty of loyalty can result in severe consequences, including legal liability and penalties. Therefore, it is essential to take your fiduciary responsibilities seriously and seek the guidance of legal and financial professionals when necessary.

This blog does not contain an exhaustive list of fiduciary duties. However, fiduciary duties and responsibilities are essential to managing a 401(k) retirement plan. Because your decisions affect all 401(k) plan participants, you are responsible for making the best decisions possible. You must act in the best interest of plan participants, being prudent in your choices, having diverse investment options, monitoring the plan's assets and expenses, and following the governing plan documents. This blog post should not be considered tax or legal advice. 

Please set up a consultation if you need help reviewing your fiduciary responsibilities and creating a process. Though CUI Wealth Management is in Salt Lake City, Utah, we serve clients in many states. Please see the website footer for a complete list of states we serve.