01(k) Plan Fiduciaries: Responsibilities, Challenges and Best Practices.
Jeff J. Kim
Serving as a fiduciary for a 401(k) plan means you're responsible for managing and overseeing the retirement savings of the people who participate in the plan—usually the employees of a company. This role comes with serious responsibilities, as you must always act in the best interest of the plan’s participants and their beneficiaries. This article explains what it means to be a 401(k) fiduciary, what responsibilities come with the role, the challenges you might face, and best practices for doing the job well.
What Is a Fiduciary?
A fiduciary is someone who has the authority to manage money or assets on behalf of someone else. In a 401(k) plan, fiduciaries are typically the employers who sponsor the plan, as well as anyone who makes decisions about the plan’s investments or administration. This could include members of an investment committee or plan administrators.
Key Responsibilities of a 401(k) Fiduciary
Acting in the Best Interest of Participants: As a fiduciary, your primary duty is to act in the best interest of the plan participants and their beneficiaries. This means all decisions should be made with the sole purpose of helping participants save for retirement and covering the necessary costs of running the plan. You must avoid any situations where your interests could conflict with those of the participants.
Making Prudent Decisions: Fiduciaries are expected to make decisions with care and diligence, similar to how a reasonably careful person would manage their own money. This includes choosing appropriate investment options, keeping an eye on how those investments are performing, and ensuring that the costs associated with the plan are fair and reasonable.
Diversification of Investments: To protect participants' savings from significant losses, fiduciaries must ensure that the investment options offered by the 401(k) plan are diversified. This means spreading investments across different types of assets (like stocks, bonds, and cash) so that a downturn in one area doesn’t lead to a huge loss for participants.
Challenges Faced by 401(k) Fiduciaries
Complexity of Investment Choices: 401(k) plans often offer a wide range of investment options, which can be overwhelming both for participants and for fiduciaries who have to manage them. It’s a fiduciary’s job to ensure that these options are suitable for participants and that they’re easy to understand.
Regulatory Compliance: The laws and regulations governing 401(k) plans are complex and can change over time. Fiduciaries need to stay informed about these changes to avoid penalties and legal issues. This can be challenging, especially if you’re not a legal or financial expert.
Avoiding Conflicts of Interest: Fiduciaries must be careful to avoid any situations where their personal interests could conflict with their duty to the plan participants. For example, if you’re selecting a service provider for the plan, you must ensure that your choice is based solely on the best interest of the participants, not on any benefits you might receive.
Best Practices for 401(k) Fiduciaries
Establish a Clear Structure: Setting up a formal structure, like an investment committee, can help you manage the 401(k) plan effectively. This structure should include defined roles and responsibilities, regular meetings, and a clear process for making decisions and documenting them.
Review Fees and Expenses Regularly: Fiduciaries must ensure that the fees associated with the 401(k) plan are reasonable compared to the services provided. Regularly reviewing and benchmarking these fees against industry standards can help you meet this responsibility. Being a fiduciary for a 401(k) plan is a role that carries significant responsibilities and challenges. By acting in the best interest of the participants, making prudent decisions, and following best practices, fiduciaries can effectively manage the plan and help participants achieve their retirement goals. This not only helps protect the fiduciary from potential legal risks but also ensures that plan participants are well-positioned to achieve their retirement goals.
I’m here if you have any questions or comments.
Have a great week,
Jeff J. Kim, CFP®
Corporate Retirement Plan Specialist
Gerber Kawasaki
Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California. Gerber Kawasaki Wealth & Investment Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Gerber Kawasaki Wealth & Investment Management 's current written disclosure brochure filed with the SEC which discusses, among other things, Gerber Kawasaki Wealth & Investment Management's business practices, services and fees, is available through the SEC's website at: http://www.adviserinfo.sec.gov .
Jefferey Kim is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$2.6B billion in assets under management as of 12/31/23. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."