From the Hotline: Employer Responsibilities for Terminating a 401(k) Contract

Question: What are an employer’s responsibilities to its 401(k) plan if the employer terminates the contract with the third party administrator managing the plan?

Answer: As the 401(k) plan sponsor, the employer is required (by ERISA) to provide fiduciary oversight to the plan.  The employer never loses that fiduciary responsibility, even if the company uses a Third Party Administrator (TPA) to administer the plan.  If the plan sponsor makes the determination that the current TPA is unsuitable, then employer can certainly make other arrangements to ensure continuity and prudent fiduciary management of the account.

You asked about the plan sponsor’s obligations for the 401(k) plan.  The Department of Labor has produced a PDF booklet that does a good job of summarizing the key items you should know (http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html#.UMc7ene5UlQ).  It covers the scope of ERISA’s protections for private-sector retirement plans (public-sector plans and plans sponsored by churches are not covered by ERISA) and provides a simplified explanation of the law and regulations. It is not a legal interpretation of ERISA and really isn’t intended to be a substitute for the advice of a retirement plan professional.

In summary, here are the major items that you will need to take care of if you plan on administering the plan in-house:

  • Ensure that the Plan has a written plan document that describes the benefit structure and guides day-to-day operations;
  • Ensure that there is a trust fund (or other funding vehicle)to hold the plan’s assets;
  • Ensure that the Plan has a recordkeeping system to track the flow of monies going to and from the retirement plan; and
  • Ensure that the plan has documents to provide plan information to employees participating in the plan and to the government.

If you decide not to retain another TPA and use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations, then that group will need to be aware of their fiduciary responsibilities.   They will be responsible for the items listed in the bullet points above as well as the business decisions (not ERISA-governed) to establish the plan, to determine the benefit package, to include certain features in the plan, to amend the plan, and to terminate the plan.

Fiduciaries act on behalf of participants in a retirement plan and their beneficiaries and carry the following responsibilities (from the ERISA regulations):

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

With these fiduciary responsibilities, there is also potential liability. The Company sponsoring the plan and the fiduciaries may face liability and penalties.  Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.