What Are a 401(k) Plan Sponsor’s Fiduciary Responsibilities?

The Short Answer

Under the Employee Retirement Income Security Act (ERISA), individuals and committees who exercise discretion over a 401(k) plan’s management or assets are fiduciaries. Their core fiduciary responsibilities include acting solely in the interest of participants and beneficiaries, acting prudently, diversifying plan investments, following plan documents, and ensuring the plan pays only reasonable expenses. Fiduciaries can be held personally liable for losses resulting from a breach, which is why a documented, prudent process is essential.

Who Is a Plan Fiduciary?

A person becomes a fiduciary based on their function, not their title. Fiduciaries typically include the plan sponsor, members of a retirement plan or investment committee, the named plan administrator, and anyone with discretionary authority over plan administration or investments. Some outside service providers, such as investment advisers, may also serve as fiduciaries depending on their role.

Understanding who holds fiduciary responsibility, and for which decisions, is a foundational governance step. The U.S. Department of Labor’s guide, Meeting Your Fiduciary Responsibilities, provides an overview.

What Are the Core Fiduciary Duties?

Duty of Loyalty

Fiduciaries must act solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and paying reasonable plan expenses.

Duty of Prudence

Fiduciaries must act with the care, skill, prudence, and diligence that a knowledgeable person would use in similar circumstances. Courts generally focus on the process: whether fiduciaries investigated, deliberated, and documented decisions, rather than on outcomes alone.

Duty to Diversify

Plan investments should be diversified to minimize the risk of large losses, unless it is clearly prudent not to do so.

Duty to Follow Plan Documents

Fiduciaries must operate the plan in accordance with its governing documents, to the extent they are consistent with ERISA.

Duty to Pay Only Reasonable Expenses

Fiduciaries must understand the fees paid by the plan and participants and determine that they are reasonable for the services provided.

What Does Ongoing Oversight Involve?

Fiduciary responsibility is continuous. In Tibble v. Edison International (2015), the U.S. Supreme Court confirmed that fiduciaries have an ongoing duty to monitor plan investments and remove imprudent ones. Ongoing oversight commonly includes:

• Maintaining an investment policy statement and reviewing investments against it
• Monitoring service providers and their fees, including reviewing required fee disclosures
• Benchmarking costs periodically
• Reviewing the plan’s qualified default investment alternative, often a target date fund series
• Ensuring timely deposit of participant contributions
• Providing required participant disclosures
• Documenting meetings, decisions, and the rationale behind them

Newport’s articles on target date funds, fee levelization, and employee benefit plan controls address several of these areas.

How Can Plan Sponsors Manage Fiduciary Risk?

While fiduciary responsibility cannot be eliminated, it can be managed:

• Establish a committee and charter: A defined committee with clear responsibilities supports consistent decision-making.
• Document a prudent process: Meeting minutes and written rationales demonstrate how decisions were made.
• Delegate appropriately: Hiring qualified professionals, such as a 3(21) adviser or a 3(38) investment manager, can share or transfer certain responsibilities, though sponsors retain the duty to prudently select and monitor them.
• Use ERISA Section 404(c) protections: For participant-directed plans that meet the regulation’s requirements, fiduciaries may receive relief from liability for participants’ investment choices.
• Maintain fiduciary insurance and the required ERISA bond: These serve different purposes and should both be reviewed.
• Provide fiduciary training: Committee members should understand their responsibilities.

The Takeaway

Plan sponsors who understand their fiduciary duties and follow a disciplined, documented process are better positioned to serve participants and manage risk. Newport serves as a 3(21) and 3(38) fiduciary partner to sponsors of 401(k), 403(b), defined benefit, and nonqualified plans; learn more about our institutional consulting services.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.