If you are currently offering a SEP-IRA or SIMPLE IRA Plan but looking to switch, or start a new workplace retirement plan altogether, here is a crash course on how 401(k) Plans work. Generally, there are four key components to maintaining a 401(k) Plan.
ERISA FIDUCIARY
THIRD-PARTY ADMINISTRATOR
RECORDKEEPER
CUSTODIAN
Under ERISA, a “fiduciary” is any person who (1) exercises any discretionary authority or control over the management of a plan or the management or disposition of its assets, (2) renders investment advice for a fee or other compensation with respect to the funds or property of a plan or has the authority to do so, or (3) has any discretionary authority or responsibility in the administration of a plan. First and third descriptions define most Plan Sponsors (owners or employers).
An ERISA 3(38) Fiduciary Investment Manager is any fiduciary (other than a trustee or named fiduciary) who has the power to manage, acquire, or dispose of plan assets; is either a registered investment advisor under the Investment Advisers Act of 1940, a bank, or an insurance company; and has acknowledged its fiduciary status in writing to the plan. The fiduciary acts as the investment manager with discretionary authority that may extend over all the assets of the plan. Investment manager assumes all fiduciary responsibilities as it pertains to the investments chosen for the plan.
Plan Sponsors often take on fiduciary duties themselves to reduce plan costs. However, it’s strongly recommended to delegate these responsibilities to a registered investment advisor. Managing the plan’s investments without proper due diligence can expose the Plan Sponsor to personal liability for mismanagement.
Ultimately, the Plan Sponsor is responsible for the plan’s oversight. Even when hiring an ERISA Fiduciary, the Plan Sponsor must ensure the advisor acts in the best interest of the plan and its participants.
TPAs perform a variety of non-discrimination and compliance tests and prepare filings, such as the Form 5500 to stay compliant with regulatory agencies – the IRS and the DOL. They generally assist with:
Most group retirement plans require a Recordkeeper. Recordkeepers play a key role in the relationship between investment manager and the plan participants. They are responsible for managing the plan’s ongoing tasks, such as:
All plans require a Custodian. The Custodian (usually a brokerage firm/trust company) is responsible for holding the assets for the plan. The Custodian and the Recordkeeper work closely to ensure all participant transactions are processed accurately. In most group retirement plans, there is a direct relationship between the two.
A type of retirement plan in which a participant’s benefits are based solely on the value of the participant’s account balance; the value of that account balance depends on the level of employer and employee contributions and the earnings on those contributions.
A retirement plan that promises a specific predetermined benefit at retirement, usually defined by a formula with reference to factors such as salary and years of service. Since the benefit is not determined by allocated contributions and investment earnings as in a defined contribution plan, the sponsor, not the employee, bears the investment risk.
A designated party, usually a company or employer, that established an employee welfare or retirement plan for the benefit of the organization’s employees.
The entity, individual, or group of individuals who are designated to hold the assets of the trust for the benefit of plan participants and beneficiaries. Trustees are either designated in the plan document or appointed by another fiduciary, typically the employer that sponsors the plan.
An individual or a company responsible for managing a retirement plan’s day-to-day operations on behalf of the employer and its participants. Sometimes the Plan Sponsor may act in this capacity or hire an outside company. Plan Administrator is not the Third-Party Administrator (TPA).
An individual who is eligible to and in fact does participate in a retirement or welfare benefit plan in accordance with its term.
An ERISA required form of business insurance that offers the Plan protection against losses that are caused by its employees’ fraudulent or dishonest actions. This form of insurance can protect against monetary or physical losses.
The Form 5500 Series is part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants and beneficiaries, as well as regulators, are provided or have access to sufficient information to protect the rights and benefits of participants and beneficiaries under employee benefit plans.
A legal term that means to give or earn a right to a present or future payment, asset, or benefit. It is commonly used in reference to retirement plan benefits when an employee accrues nonforfeitable rights to the employee’s qualified retirement plan account or pension plan benefits.
