401(k) Service Providers and the Role They Serve
With new 401(k) audit clients, we have Q+A sessions to learn how each Plan operates. Our discussions include identifying all vendors contracted to provide various services to their Plan.
Employers demonstrate a solid understanding of who is involved and what services are being performed, but there tends to be less familiarity with the industry labels assigned to each provider. The purpose of this article is to discuss common 401(k) providers along with roles each may serve.
Probably the most feared label, and among the least understood, is the word - fiduciary. In general terms, a Plan fiduciary is defined as anyone who makes decisions related to the administration of the Plan or who is involved in the selection of investment choices. For a deeper discussion of 401(k) plan fiduciaries, please refer to our post – What is a 3(16), 3(21), or 3(38) fiduciary?
After establishing a qualified retirement plan, the Employer or Company is referred to as the Plan Sponsor.
The person or entity specifically designated to oversee the operations of the Plan. If there hasn’t been a specific written designation, the Plan Sponsor serves as Plan Administrator.
The trustee(s) of the Plan have exclusive authority and discretion to manage and control assets. The Trustee will be named in the Plan Document (or adoption agreement) and can be an individual, such as the Company President, CFO, or could be the Company itself. Alternatively, the custodian (described below) is commonly named as Trustee.
The custodian is the financial institution or insurance company holding the assets of the Plan. For Plans using bundled services, the custodian may be selected by your record keeper, and the Plan Sponsor may have little to no direct interaction with the custodian.
Much like the name suggests, the role of the record keeper is to track and account for data within the Plan. Many times, the record keeper is the entity maintaining the website which allows your employees access to see their balances and make changes to their accounts.
The TPAs role can be confusing as not all TPAs perform the same services. In addition, bundled solutions exist and record keepers perform some of the services listed below - further blurring the distinction between the two providers.
Nearly all TPAs assist with compliance matters such as performing annual non-discrimination testing to verify the Plan isn’t disproportionally favoring highly compensated employees and the preparation of IRS Form 5500. Many are also involved with processing distributions/loans and assisting with Plan design.
A good TPA will reconcile data, verify timely remittance of contributions, monitor compliance, and conduct analytical analysis to help identify administrative failures. Further, a good TPA understands your organizational goals and assists in structuring your Plan to help achieve desired objectives. If your TPA isn’t making your Plan better, or making your life easier, you likely don’t have the right TPA.
Investment advisors and investment brokers assist with the selection of the Plan’s investment choices. They will typically meet with Sponsors at least annually and will assist with the monitoring, benchmarking and replacement of investment choices (as needed). Advisors are regulated differently than brokers. Generally, advisors are required to act in the interest of the Plan where a broker isn’t held to the same fiduciary standards.
Every 401(k) Plan is required to file an annual IRS tax return (Form 5500). Large plans, generally over 100 employees, are required to hire an independent CPA firm to audit the annual financial statements of the Plan. The audit report issued by the CPA firm is then required to be attached to the annual tax filing.
A recent study by the Department of Labor (DOL), Assessing the Quality of Employee Benefit Plan Audits, indicated that roughly half of the CPA Firms issuing employee benefit plan (“EBP”) audit reports only audit one or two Plans. This same study shows that CPAs performing fewer employee benefit plan audits tended to have the highest proportion of deficient audits.
When interviewing an audit firm, remember two important questions: (1) how many EBP audits does your firm conduct annually? and (2) are you a member of the AICPA’s Employee Benefit Plan Audit Quality Center?
As the Department of Labor increases its push for transparency in the fees paid from Plan assets, it has become increasingly popular for Plan Sponsors to conduct a “fiduciary audit”. The fiduciary auditor will perform a review of the fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (“ERISA”) as they pertain to monitoring plan expenses, investment performance, employee education and your investment policy statement.
An attorney who specializes in employee benefits law and is well versed in the requirements of ERISA. When significant failures in Plan design occur, both regulatory and operational in nature, there are corrective actions needed which come with significant costs. A knowledgeable ERISA Attorney can be a valuable resource to determine your best course of correction and may limit damages to the Plan/Sponsor.
Important to note: Many industry players are able to fulfill multiple roles. Fidelity Investments, for example, may assist in establishing the Plan’s core investment lineup, perform record keeper duties, serve as custodian, be named as trustee, and fulfill many of the same duties that a third-party administrator would perform. Accordingly, it is important that you read each providers service agreement to see what services they are providing and to determine how they will be compensated.
Scott M Dufek, CPA | 02/03/2020