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No founder ever started a business so they could administer a 401(k) plan. The 401(k) plan, if one exists, was likely started as a recruiting and retention tool and to assist employees in planning for retirement.

In a large company the 401(k) is usually administered by a large department designed and developed for that sole purpose. These departments employ ERISA experts and ERISA lawyers to ensure that they are meeting government compliance requirements and are protecting the company from fiduciary liability.

In a typical small/medium business 401(k) plan, the task of administering the 401(k) plan normally falls to a member or members of the administrative or human resources organization. These employees often have primary responsibilities other than 401(k) administration so the 401(k) does not receive full-time focus.

What business owners and managers don’t realize is that administering a 401(k) isn’t a “normal” administrative task. Being organized, detail oriented and having other administrative abilities that are required for “normal” administrative tasks are important, but to properly administer a 401(k) plan, ERISA law knowledge and expertise is required, but not normally present in a small/medium company administrative or HR department.

The consequences of not performing the tasks properly can create significant problems for owners and managers of these companies. Nearly 3 of 4 small and medium companies randomly audited by the Department of Labor fail the audit resulting in significant fine/penalty exposure and loss of productivity for the average 42 days that the audit is being conducted.

Being out of compliance can also act as a signal to lawyers looking for class action lawsuits to file on behalf of participants who may feel they have been financially harmed by ineffective plan administration. Add to this the fact that in most situations, owners and managers are instrumental in deciding what investment vehicles go into the plan and you have an additional situation that can drive class action lawsuits on behalf of participants who feel they may have been financially harmed by ineffective selection of investments.

There is an answer to this problem. Third Party Fiduciary Outsourcing of the administration and investment responsibilities has become a viable and attractive option for small/medium businesses over the last few years. These Third Party Fiduciary Outsourcing companies not only perform virtually all the administration on the plan but also employ ERISA experts and ERISA attorneys who make sure that the work is done right in order to protect owners and managers against compliance exposure (called 3(16) services in the retirement industry). These companies also perform the investment menu selection for the plan and accept fiduciary responsibility for those selections (called 3(38) services in the retirement industry).

Caution is recommended, however, because there are many providers who claim to offer full Third Party Fiduciary Outsourcing services but fail to fully support the concept. Business owners and managers who choose to use a Third Party Fiduciary Outsourcing provider who does not meet the criteria below may find that their efforts at eliminating administrative tasks and protecting themselves from compliance concerns and fiduciary liability are not effective.

Similar in concept, other outsourcing providers such as payroll, human resources, CPA services, etc. the true 401(k) fiduciary outsourced service provider accepts, in writing, liability for management of the plan according to the plan documents and Department of Labor and IRS regulations. If things are not done properly the burden of fiduciary liability falls to the fiduciary outsourcing provider – not the business owners or managers. This is true of the administrative responsibility because the outsourcing provider is the Plan Administrator listed on the plan. It is true for the investments within the plan if the outsourced provider is a Named Fiduciary on the plan and signs the 5500 tax form for the plan as the Plan Administrator (not simply as preparer).  

Also, the true full Plan Administrator must have a way of independently verifying participant data before it reaches the recordkeeper. This acts as a safeguard for all parties involved, and allows the Plan Administrator to be the sole line of defense with the Department of Labor (i.e., the DoL should come to the Plan Administrator, not the Plan Sponsor for any questions / audit documentation relating to the plan).

Any small/medium company who wishes to use a 401(k) Third Party Fiduciary Outsourcing company should ensure that the provider meets these requirements and has the experience, technology and manpower to accomplish the tasks that these requirements demand.

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