The Players Behind a 401(k) Plan

Building and maintaining 401(k) plans require a comprehensive array of administrative and investment professionals. They are subject to many rules and regulations from not just the DOL, but from the SEC, and now possibly FINRA too. Do you know the specific roles and duties of the “players” involved in a 401(k) plan? Many advisors, plan sponsors, let alone plan participants, do not. 

As of December 31, 2017, 401(k) plans held an estimated $5.3 trillion in assets and represented 19% of the $27.9 trillion in US retirement assets, which includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private- and public-sector employers), individual retirement accounts (IRAs), and annuities.¹ In comparison, over 10 years ago, 401(k) assets were around $3.0 trillion. Assets have increased 76% since then!

There are a number of players behind a well-run, responsible, and legally compliant 401(k) plan. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for these services. We at BCM can be viewed as a service provider, offering 3(38) services, investment lineup creation and monitoring as well as investment management through our DynamicBelay® Target Date Funds. Below, we delve into the service providers that make up the “DNA” of a 401(k). 

Recordkeeper

The Recordkeeper is the primary 401(k) provider as they are typically the most visible provider to the participants. Their role is to manage and track the data within the 401(k) plan like contributions and earnings, and communicate that data to other necessary parties. Most importantly, recordkeepers work for the participants and are responsible for enrollment and education, preparing and mailing statements, and many provide online portals for participants to access information about their retirement assets.

Custodian 

The custodian for a 401(k) plan is like a bank. They are responsible for moving money, paying plan providers and safekeeping assets in a plan. A custodian will not provide investment advice nor have a say in how the assets should or will be invested. 

Third Party Administrator

The TPA or “Third Party Administrator” manages most of the day-to-day aspects of the plan including compliance in accordance to ERISA. Compliance work consists of items like preparing your annual 401(k) tax filing (5500), managing plan documents, and performing required annual non-discrimination testing on the plan. Unlike the recordkeeper, the TPA works for the employer or plan sponsor. Some TPA firms are also Recordkeepers so often plans may use the same company for both of these functions but in many cases, your TPA firm is a local company separate from your Recordkeeper.

Fiduciaries 

The “fiduciary” role has become a frequented buzzword and hot topic in the retirement space within the last few years.  A 401(k) plan fiduciary is someone that has a legal obligation to act in the sole interest of participants on the plan. This does not mean the sole interest of the sponsor or the employer. Fiduciary services relate back to the 3 (21) and 3 (38) sections of the Employee Retirement Income Security Act of 1974. 

3 (38) Fiduciary

The 3 (38) investment advisor has the discretion to make fund decisions. The plan sponsor has less liability in this relationship, because they offload fiduciary risk for investments to the advisor, or in some cases the investment manager.

3 (21) Fiduciary

The 3(21) investment advisor is a co-fiduciary role. An advisor provides advice to an employer with respect to funds on a 401(k) investment menu, but the employer retains the discretion to accept or reject the advice.

3 (16) Fiduciary

The 3 (16) is the plan administrator with ERISA reporting and disclosure duties. They are responsible for the day-to-day operations of the plan.

Financial Advisor

Most everyone will recognize and understand the role of the Financial Advisor. Financial Advisors are financial professionals, that provide investment advice for a fee. Unfortunately, there is a confusing spectrum of Financial Advisors in the 401k market – including brokers, insurance agents, investment advisors and financial planners. The key difference between them is their required standard of care. The financial advisor can also serve as the 3(38) fiduciary over the investment options, but in many cases there can be another party involved to serve as the 3(38) such as a specialized investment manager. It’s all up to the advisor and the plan sponsor to determine the best structure for each plan.

Where To Start

Hopefully you now have a better understanding of the parties involved in a 401(k) plan and their respective duties to the betterment and management of a plan lineup. If you want to learn more, or if you currently play a fiduciary role on a plan, you might benefit from deeper insights on what you need to know and do to remain compliant with ERISA and DOL expectations in “Questions a Fiduciary Must Be Able To Answer About Their Target Date Funds (TDFs)”.