Ultimate Account Blog

What You Need to Know As an Employee 401(K) Plan Sponsor

401(k), fiduciary responsibilities


Employer sponsored retirement plans, most commonly 401(k) plans, have been under more scrutiny over the past few years from the Department of Labor (DOL).  Knowing that in 2015, American workers had $4.7 trillion invested in 401(k) plans, the DOL was more interested in ensuring employees’ retirement accounts were being appropriately handled.  Sponsors of company plans are inherently fiduciaries.  This means employees who are investing in the plan are entrusting fiduciaries to act with a duty of care and trust to safeguard their investments.  Below are a few responsibilities of a fiduciary.

Acting Solely in the Interest of the Participant

It is expected that when plan decisions are made, they are made solely with the interest of the participant in mind.  A lawsuit against Morgan Stanley shows how it can appear you are not acting in the employees’ best interest.  A class action lawsuit was recently filed against Morgan Stanley on behalf of their employees claiming the company’s priority with the 401(k) plan was to maximize the company’s profits.  The plan only had investments from Morgan Stanley portfolios.  In some cases, the investments had higher fees than similar funds and were performing worse.  Even if it wasn’t the intention to increase the bottom line for Morgan Stanley, there is an appearance that the employee was not being considered.

Diversifying Plan Investments

The first rule of investing is diversification.  The key to fulfilling fiduciary responsibility with investment options is to ensure employees have a variety of different funds to invest in.  For example, you would want to offer a mix of equity and bond funds, domestic and international funds, and a mix between aggressive and conservative funds.  However, you should also be aware of how many options you are providing in your plan.  Research shows that by providing too many options, employees may think they are diversifying their portfolio when in reality they are still invested in similar funds.  Employees may also be overwhelmed with too many options and simply invest 100% into one option instead of researching the various options.

The funds that are selected need to be continually monitored as well.  This is where communication between fiduciary and plan administrator is imperative.  Plan administrators are able to assist in determining if any investment offerings are underperforming and they can provide suggestions of other options to replace the underperforming funds.


Any fees that are paid out of the plan are funds that are coming out of employees’ retirement accounts.  It is the fiduciary’s responsibility to ensure that these fees are reasonable and appropriate.  This includes excessive fees that are imbedded in the fund.  When choosing investment options, the natural instinct is to compare annual returns.  An investment with a return of 7% would seem better than one with a return of 5%.  However, the investment with a 7% return may charge a higher fee than the investment with a 5% return, resulting in a lower net return after fees are taken out.  Lockheed Martin recently settled a lawsuit from their employees for $62 million.  The basis of the employees’ case was that the investment options offered had excessive fees, which cut into the investment returns the employees received.

Following the Plan Document

Finally, the actual procedures in place should align with the provisions selected in the plan document.  The fundamentals of 401(k) plans are similar across all plans, but each plan is different based on the provisions selected in the plan document.  If there is ever a question of how something should be handled, the first reference should be the plan document.  One of the specific topics where the DOL has found inconsistencies in the plan document and actual practice is the definition of eligible compensation.  The plan document will specifically lay out what types of compensation should be included and excluded when determining the amount of 401(k) deferrals to be withheld from employees.


 If your retirement plan was ever selected for an audit by the DOL, having documentation of how you fulfilled your fiduciary responsibilities is one of the first things they will ask for.  Minutes should be kept for any meetings with third party providers and internal meetings in which decisions about the retirement plan are made.


By Kevin VanPelt, CPA, Supervisor