Offering a 401(k) is a powerful way to invest in your employees’ financial future but it comes with many legal and administrative responsibilities. As a plan sponsor, you must comply with regulations designed to protect employees’ retirement savings. Understanding your fiduciary duties helps minimize liability, ensures compliance, and safeguards assets, which is essential as fiduciaries of retirement plans have personal liability under ERISA (Employee Retirement Income Security Act). This means that if they fail to meet their responsibilities, they can be held personally accountable for any losses suffered by the plan.

The moment organizations establish a 401(k), fiduciary duties are assumed under the Employee Retirement Income Security Act (ERISA). You’re required to solely act in the employees’ best interests. Failure to manage the plan prudently or comply with regulations can lead to liability.

Hiring third-party service providers is encouraged when you don’t have the expertise in-house, though it does not eliminate your responsibilities. ERISA mandates active oversight of providers, meaning you retain ultimate accountability for selecting and monitoring them.

Under ERISA, a fiduciary is anyone who exercises control over plan management, administration, or assets or provides investment advice for a fee. This typically includes plan sponsors, administrators, advisors, and investment managers.

Plan administrators handle daily operations such as filings, participant notices, and recordkeeping. Even if outsourced, you must ensure your plan is compliant. Failure to oversee plan operations can lead to costly mistakes, such as missed filings and regulatory penalties.

Fiduciaries may be explicitly named in plan documents or become fiduciaries through their actions. If someone influences plan decisions, they can be considered a fiduciary.

All fiduciaries must:

• Act in participants’ best interests
• Make prudent, well-informed decisions
• Follow plan documents
• Diversify investments
• Ensure reasonable plan expenses

These rules have been in place for decades, with extensive guidance available to help sponsors comply.

1. Inadequate Service Provider Oversight

Simply outsourcing does not relieve you of responsibility. Regularly review provider performance, document oversight efforts, and ensure fees remain reasonable.

2. Recordkeeping Errors

Missing or inaccurate records—especially for loans, withdrawals, or contributions—can trigger compliance issues. Maintain organized records and use automated systems to minimize errors.

3. Miscalculating Contributions

Incorrect compensation definitions often lead to errors, such as excluding bonuses or overtime. Work with payroll and HR to align definitions with plan documents and conduct periodic audits.

4. Failing Nondiscrimination Tests

Plans benefiting highly compensated employees disproportionately may fail compliance tests. Improve participation by offering education, highlighting matching contributions, or implementing automatic features such as auto-enrollment and auto-escalation.

5. Delayed Contributions

Late deposits of employee deferrals can result in penalties and is regularly a focus of the Department of Labor (DOL). Automate payroll contributions through payroll integration with the recordkeeper when possible and regularly verify timely deposits.

6. Audits, Compliance + Regulatory Updates

Plans with 100+ participants typically undergo an annual audit. Starting in 2024, participant counts are based on those with account balances, not just those eligible.

Even if an audit isn’t required, periodic internal reviews can uncover errors before they become costly problems.

Regulators scrutinize documentation, plan definitions, and oversight processes. Keeping thorough records and promptly addressing issues can mitigate risk. The DOL and Internal Revenue Service (IRS) also offer self-correction programs, allowing sponsors to fix errors before penalties escalate. Maintain a fiduciary file so you can easily access plan documents and processes.

Managing a 401(k) plan is both a valuable benefit and a significant responsibility. While fiduciary duties may seem complex, partnering with experts and maintaining strong internal controls can help you navigate them effectively.

This article is for informational purposes only and should not be considered legal advice. Consult a qualified professional for specific guidance.