How 401(k) Pooled Employer Plans Can Mitigate Fiduciary Risk and Responsibilities

Background

Employers that offer a 401(k) retirement plan to their employees take on significant fiduciary risk and responsibilities as well as administrative duties. These fiduciary responsibilities are often held personally by the senior executives/owners of an organization, so it is important for all involved to understand the roles and obligations in managing a single employer 401(k) plan. Responsibilities include managing plan expenses, selecting and monitoring the plan’s investment options, sending participant notices, reporting taxes, and ensuring compliance with regulations. Typically, most employers do not have the internal expertise on staff to manage most of these responsibilities and may outsource part of the administrative burden. However, even with outsourcing some of the administrative services, most of the fiduciary risk still typically lies with the employer.

Role of a Plan Fiduciary And Potential Risks

The Employee Retirement Income Security Act of 1974 (ERISA) includes certain protections by requiring those who exercise discretionary control or authority over plan assets, plan management, or plan administration to be subject to a fiduciary standard. Examples of those who are typically considered plan fiduciaries would include plan administrator, plan trustee, as well as members of a plan’s investment committee. It is common that this would include the CEO and the CFO as well as the head of HR.

According to the Department of Labor (DOL), “The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”¹

The DOL further states that “Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA including their removal.” As a result, failure to fulfill these responsibilities and act in a manner that looks out for the participants’ best interest can lead to potential financial penalties and/or legal liabilities.

Focused Areas for Managing a 401(K) Plan

Examples of essential areas for managing a 401(k) plan would include:

Investment selection and monitoring
Employers must prudently select and monitor investment options offered.

Compliance and regulatory requirements
Employers must comply with various regulations, including ERISA, the Internal Revenue Code (IRC), and the DOL regulations. Examples of the various requirements include providing required participant disclosures, filing annual reports, monitoring contribution limits, and performing nondiscrimination testing.

Fees and expenses
Employers are responsible for ensuring that the plan’s fees and expenses are reasonable and adequately disclosed to participants. Failure to monitor and control these costs can erode participants’ retirement savings over time.

Participant education and communication
Employers must also provide participants with sufficient information and education about the plan to help them make informed decisions about their retirement savings.

Pooled Employer Plans and Their Impact on Fiduciary Risk Reduction

Pooled employer plans (PEPs) were introduced under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted in December 2019 and offers a new approach to managing 401(k) plans. A detailed background on PEPs can be found in our PEP whitepaper published November 2023.

As a quick summary, a PEP is a defined contribution retirement plan that allows unrelated employers to participate through a pooled arrangement in a single consolidated plan. A PEP must designate a pooled plan provider (PPP) responsible for the performance of all administrative duties, providing for a substantial reduction in the administrative burden and fiduciary risks for employers. As PEPs reflect the pooling of assets, this may also provide for overall lower costs to both participants and employers. Importantly, PEPs can also provide improved retirement outcomes for participants with access to financial wellness tools and participant communications from established recordkeeping providers.

PEPs typically provide for a fully bundled retirement plan offering that can significantly reduce the fiduciary risks and administrative burdens faced by employers, as most roles and responsibilities are usually transferred to professional fiduciaries who have the expertise and resources to effectively manage retirement plans. This can result in better investment options and improved outcomes for participants. The bundled service offering would generally include:

• The PPP, which is the overall fiduciary for the PEP and its operations, including acting as the 3(16) plan administrative fiduciary.
• The recordkeeper, who will typically provide full recordkeeping services, participant education, and financial wellness tools.
• The investment manager, who takes on the fiduciary responsibility as 3(38) investment fiduciary

While much of the fiduciary responsibilities may be transferred to the PPP in a PEP, individual plan sponsors still do maintain some level of fiduciary responsibility. This would include the decision to join a PEP and ongoing monitoring of the PEP and its service providers.

The chart below provides a summary of the various roles and how they can be coordinated within a PEP.