New to 401(k) Plans?

If you currently maintain a SEP-IRA or SIMPLE IRA Plan and looking to switch, or starting a new workplace retirement plan altogether, here is a crash course on how 401(k) Plans work.

Generally, there are four different components to maintaining a 401(k) Plan:

ERISA Fiduciary

Third-Party Administrator (TPA)



ERISA Fiduciary

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).

ERISA 3(21) Fiduciary Investment Advisor

An ERISA 3(21) Fiduciary Investment Advisor is an investment advisor who is responsible for the quality of advice and recommendations offered, agrees to apply a fiduciary standard, and is thereby subject to certain responsibilities (i.e., solely in the interest, prudence, and exclusive purpose), but serves in an advisory capacity and not as ultimate investment decision maker. Plan Sponsors should be sure to understand and clarify the duties to be performed and fiduciary responsibilities assumed by any investment advisor. Under this definition, the investment advisor and the Plan Sponsor share fiduciary responsibility as it pertains to the investments chosen for the plan.

ERISA 3(38) Fiduciary Investment Manager

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.

Sometimes, ERISA Fiduciary duties are solely performed by the Plan Sponsor (owner/employer) in hopes of keeping plan costs to a minimum. However, it is highly recommended that ERISA Fiduciary duties are performed by a registered investment advisor. What the Plan Sponsor may not realize by choosing to select and maintain an investment lineup for a retirement plan on his own without conducting proper due diligence is that the Plan Sponsor may be held personally responsible for the mismanagement of the investments in the plan.

One important thing to keep in mind is that Plan Sponsor is ultimately responsible for all aspects of the plan. Even if the Plan Sponsor hires an ERISA Fiduciary to select, manage, or monitor investments, it is the Plan Sponsor’s fiduciary responsibility to select an investment advisor/manager that acts in the best interest of the plan and its participants.


Third-Party Administrator (TPA)

Most retirement plans are required to have a TPA. TPAs perform a variety of discrimination and compliance tests and prepare filings, such as Form 5500 to stay compliant with regulatory agencies, the IRS, and the DOL. They generally assist with:

  • Plan designing services
  • Determining participant eligibility
  • Determining participant vesting
  • Calculating employer matching contributions
  • Establishing automatic enrollment
  • Providing plan document support


Most group retirement plans require a Recordkeeper. Recordkeepers play a key role in the relationship between investment manager and the plan. They are responsible for managing plan’s ongoing tasks, such as:

  • Perform daily valuations of participant accounts
  • Perform eligibility calculations
  • Automate investment election changes for participants
  • Automate investment exchanges
  • Perform contribution allocations for salary deferrals
  • Process rollovers, employer contributions and loan repayments
  • Allocate forfeitures
  • Deliver participant quarterly statements


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.

Below is a glossary of helpful terms to reference when establishing a workplace retirement plan:

Defined Contribution Plan

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.

Defined Benefit Plan

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.

Plan Sponsor

A designated party, usually a company or employer, that established an employee welfare or retirement plan for the benefit of the organization’s employees.

Plan Trustee

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.

Plan Administrator

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).

Plan Participant

An individual who is eligible to and in fact does participate in a retirement or welfare benefit plan in accordance with its term.

Fidelity Bond

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.

Form 5500

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.