Fiduciary Basics – Helping 401(k) Plan Sponsors Understand Fiduciary Status

A fiduciary is defined as a legal or ethical relationship or trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person. How does this relate to 401(k) plans?

When a company decides to sponsor a 401(k) plan they must establish a trust account to hold the contributions to the plan. Commonly, the owner or an executive of the plan sponsor will be designated as the trustee, or in some cases there may be multiple trustees. The trustee is charged with oversight of the assets held in trust for the benefit of the participants and beneficiaries.

As a fiduciary, the two most important duties of the trustee is to invest the assets of the plan and monitor expenses. In today’s 401(k) environment, the most common approach to investing plan assets is to offer the participants a menu of funds so they can create their own asset allocation. Some plans also offer a brokerage account window. In a brokerage account, participants have complete access to all traded securities in the marketplace. However, when a trustee selects a lineup of funds they are limiting the investment choices of the participants. This limited access exposes the fiduciary to significant liability, and they are then held to a prudent expert rule. They must use prudence when selecting the funds to include in the lineup. Performance is not the only variable to consider. In fact, the courts have placed more emphasis on the fees related to the selected options instead of performance. While there hasn’t been legislation, at least not yet, to mandate index funds be included in a trustee selected fund lineup, the U.S. Department of Labor has strongly suggested inclusion so participants have access to lower cost options.

To my knowledge, there has not been a single successful lawsuit brought against a fiduciary for selecting only the lowest cost index funds available for a given plan. Lawyers have tested the courts for fee cases and won. As more attorneys seek new streams of revenue, expect to see more litigation over excessive 401(k) fees. If you are a trustee or have the authority to make decisions over the disposition of plan assets, or the selection of service providers, then you are probably a fiduciary. More than likely your service providers are NOT a fiduciary, so you need to make careful informed decisions. Objective, expert advice is invaluable, and it never hurts to have a documented second opinion.

by Richard Phillips AIF, ERPA, CPC, QPA, QKA