Understanding Your Fiduciary Responsibility: A Key to 401(k) Plan Success

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In the realm of retirement planning, 401(k) plans stand as pillars of financial security for millions of Americans. These employer-sponsored retirement accounts offer a powerful tool for individuals to save and invest for their golden years. However, with great power comes great responsibility, and this rings particularly true for those tasked with managing these plans.

Enter the concept of fiduciary responsibility—a critical aspect of overseeing 401(k) plans that often doesn’t receive the attention it deserves. The size and scope of CoSource’s current practice and our proven history of providing expertise in servicing retirement plan clients in this rapidly changing regulatory environment make us your premier partner for qualified plans. Our infrastructure, tools, resources and experience are integral to our continued growth in the regional and national retirement plan marketplace.

What is Fiduciary Responsibility?

Fiduciary responsibility refers to the legal obligation to act in the best interests of another party. In the context of 401(k) plans, fiduciaries are individuals or entities entrusted with managing the plan assets and making decisions that impact plan participants. This includes plan sponsors, trustees, administrators and investment managers.

The Employee Retirement Income Security Act (ERISA) imposes strict fiduciary standards on those responsible for overseeing retirement plans, including 401(k)s. These standards require fiduciaries to:

  • Act solely in the interest of plan participants and beneficiaries;
  • Exercise prudence in their decision-making;
  • Diversify plan investments to minimize risk, unless it’s clearly prudent not to do so; and
  • Follow the plan documents to ensure compliance with the law.

Why Knowing Your Fiduciary Responsibility Matters

Understanding fiduciary responsibility is paramount for several reasons:

Legal Compliance. Failing to fulfill fiduciary duties can result in legal consequences, including lawsuits, penalties and fines. Courts hold fiduciaries accountable for breaches of their duties, emphasizing the importance of adhering to ERISA guidelines.

Financial Security. The decisions made by fiduciaries directly impact the retirement savings of plan participants. Acting in their best interests can help safeguard their financial futures, helping ensure that they have adequate resources to support themselves during retirement.

Reputation Management. For employers offering 401(k) plans, maintaining a reputation for responsible stewardship is essential. Demonstrating a commitment to fulfilling fiduciary obligations can enhance trust among employees and attract top talent.

Risk Mitigation. By understanding their fiduciary responsibilities, plan sponsors can identify and mitigate potential risks associated with 401(k) management. This includes conducting thorough due diligence when selecting investment options, monitoring plan performance, and regularly reviewing fees and expenses.

Fiduciary Quality Management Process

As a 3(21) advisor, we provide advice to the plan sponsor, but we don’t make the final decisions regarding the plan’s investment lineup. We are here to provide outside investment expertise, but you retain final discretion over the plan.

Organize. During the organize stage, we identify laws, governing documents and other sources of guidance for fiduciary conduct.

Formalize. During the formalize stage, we identify the substantive investment objectives and constraints, formulate asset allocation strategies and adopt an investment policy statement to guide the investment decision-making process.

Implement. The implement stage is when investment and service provider due diligence is performed and decisions about investment safe harbors are made.

Monitor. During the monitoring stage, we engage in periodic reviews to help ensure that the investment objectives and constraints are being met and that the Prudent Practices are consistently applied.

Fund Monitoring and Grading System

3(21) Advisory Services. As a 3(21) advisor, we assume “co-fiduciary” responsibility. We offer objective advice and recommendations to you, but you make the actual decision as to selecting, monitoring and removing plan investments.

Given the “co-fiduciary” nature of the relationship, you are assured that the advice you receive is prudent, objective and independent from conflicts of interest.

Fi360 Software. In order to monitor the performance and characteristics of each investment option and to determine their continued appropriateness, investments will be reviewed at least annually using Fi360 software and the following criteria—Inception Date, Manager Tenure, Assets, Composition, Prospectus Net Expense Ratio, Style, Alpha, Sharpe, 1-year Return, 3-year Return and 5-year Return.

Annual Formal Plan Review. To conduct due diligence, we go through a formal review process with your investment committee on an annual basis.

During this review, your investment options will be evaluated, alternative investment options will be discussed, and your company’s Investment Policy Statement will be revisited.

DOL Releases Final Fiduciary Rule Package

On April 23, 2024, the Department of Labor (DOL) released their final rule regarding the definition of an investment advice fiduciary and amendments to related Prohibited Transaction Exemptions.[1] The regulations become effective September 23, 2024, but changes to the related Prohibited Transaction Exemptions have a delayed effective date of September 2025.

The final rule requires all elements to be met to be deemed fiduciary investment advice. The new rule defines fiduciary investment advice as (1) the person either directly or indirectly makes professional investment recommendations to investors on a regular basis as part of their business, and the recommendation is made under circumstances that would indicate to a reasonable investor that it’s reliable or (2) the person represents or acknowledges that they are acting as a fiduciary.

Fiduciary responsibility lies at the heart of effective 401(k) plan management. By understanding and fulfilling these obligations, plan sponsors and other fiduciaries can uphold their legal duties, protect the interests of plan participants and promote financial security in retirement. Investing the time and resources into comprehending and meeting fiduciary standards is not just a legal requirement—it’s a fundamental step towards building trust, minimizing risk and pursuing successful outcomes for all stakeholders involved.

Employees who withdraw funds in a 401(k) plan before age 59½ may have to pay a 10 percent tax on any withdrawals, in addition to any regular income tax. Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance is not a guarantee of future results. Neither diversification nor asset allocation assure or guarantee better performance and cannot eliminate the risk of investment losses.  

[1] empower.com

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