In Wealth Management

401(k) plans are a powerful way to build wealth for retirement, as demonstrated by the much higher maximum contributions levels vs. traditional IRAs.  However, some small businesses shy away from offering these plans, as the administrative burden for implementing these plans is no small task and there is potential liability exposure for those who fail to comply with the rules and regulations. 401(k) compliance issues can be a major headache.

Don’t Underestimate 401(k) Compliance Issues

In the last 10 years, there have been 83,000 ERISA related lawsuits.  Defendants can be held personally liable in these cases.  One of the easiest ways that small business owners can stay in 401(k) compliance is to hire the right people to help them make good decisions.  I believe that the best option is to hire a “fiduciary” in those areas where you believe there could be a blind spot.  A “fiduciary” a legal term that means the person is bound to ethically act in the plan sponsor’s best interests.  It is the highest level of service you can get in financial service world, and plan sponsors should not settle for anything less.

Here is a brief overview of the three types of fiduciaries that can be of help to a small business 401(k) plan sponsor.  Each type is labeled according to the section of federal law which regulates their activities.

Section 3(16) Fiduciary (Administrative Fiduciary):

The 3(16) Fiduciary acts on the behalf of the plan sponsor with respect to the plan sponsor’s administrative functions and also assumes liability for these tasks.  The organizations that provide these services are typically specialized third party administrators (TPAs) and are not investment advisers.  In these circumstances, a 3(16) Fiduciary takes discretionary control over the plan’s administrative and operational functions to be in 401(k) compliance with ERISA rules and regulations.

In acting as the plan administrator, a 3(16) Fiduciary would be responsible for filing and signing the annual Form 5500, distributing documents in accordance with ERISA disclosure rules, interpreting eligibility criteria, correcting plan errors, and ensuring timely processing of contributions.  Therefore, the liability for these tasks shifts from the plan sponsor to the 3(16) Fiduciary, who would be liable for any penalties or costs that arise from 401(k) compliance failure.

Section 3(21) Fiduciary (Investment Fiduciary):

A 3(21) Fiduciaries is an investment adviser that helps plan sponsors manage their fiduciary risks by helping them navigate the complex world of investments and help the plan sponsor make good decisions.  However, ultimately, the plan sponsor retains the authority (and accountability) for making and implementing investment recommendations of the investment adviser.  3(21) Fiduciaries are advisors who will help select the initial lineup, monitor & analyze existing investments, and recommend line-up changes.  In addition, 3(21) Fiduciaries may also offer educational services to participants in the plan.  It is important to note that 3(21) Fiduciaries do not shift liability away from the plan sponsor regarding investments, but they do help lower the plan sponsor’s fiduciary risk by assisting with prudent decision making.

Section 3(38) Fiduciary (Investment Fiduciary):

A 3(38) Fiduciary is an investment adviser that is given the authority and discretion to implement investment recommendations.  3(38) Fiduciaries differ from 3(21) Fiduciaries in the fact they manage the plan assets.  As such, they also shift the liability for all investment decisions from the plan sponsor to themselves.

For instance, if a top-performing mutual fund loses its key manager, a 3(21) Fiduciary may strongly recommend switching into another option.  But if the plan sponsor doesn’t implement the decision to change the line-up, the plan sponsor may be solely liable for this investment decision.  In the above case, a 3(38) adviser would simply make the change (avoiding the time-consuming process of communicating with the plan sponsor, investment committee, plan administrator, etc.) and be fully liable for the decision.

While the 3(38) Fiduciary does legally shift the liability for investment decisions from the plan sponsor to the 3(38) Fiduciary, it does not absolve the plan sponsor from other plan-related fiduciary responsibilities.

I’m Here To Help with 401(k) Compliance

Sapling Wealth Management offers both 3(21) and 3(38) investment adviser fiduciary services.  My 3(38) Fiduciary service package also comes with additional participant education and support, such as one-on-one meetings and after-hours access.

If you are curious about exploring the details of these options, please call me, and let’s set up a time to chat.

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