Offering a 401(k) plan is one of the best ways to attract and retain great employees — but as a business owner, it also comes with fiduciary responsibilities under federal law. Understanding these duties is critical to staying compliant, protecting your business, and ensuring your employees’ retirement savings are managed properly.
In this article, we’ll break down what fiduciary responsibility really means, the legal obligations plan sponsors face, and how you can limit liability while maintaining a compliant, high-quality retirement plan.
What Is a 401(k) Fiduciary?
A fiduciary is any individual or entity that manages or exercises authority over a 401(k) plan’s assets, or has influence over decisions made on behalf of participants.
In most small businesses, the plan sponsor — usually the owner or key decision-maker — automatically becomes a fiduciary. If you select the investment options, approve plan changes, or oversee administrative duties, you’re acting in a fiduciary capacity.
The Core Fiduciary Duties of a 401(k) Plan Sponsor
1. Duty of Loyalty
You must act solely in the best interest of plan participants and beneficiaries. That means all decisions — from choosing investment options to approving service providers — must benefit your employees, not your business or personal interests.
2. Duty of Prudence
Plan sponsors must make decisions with the care, skill, and diligence that a knowledgeable expert would use. This includes regularly reviewing investment performance, understanding fees, and documenting all plan decisions.
3. Duty to Diversify Investments
Fiduciaries are required to offer a diversified mix of investment options to minimize the risk of large losses. This helps protect participants’ retirement savings from being overly dependent on one type of investment or market condition.
4. Duty to Follow Plan Documents
Every 401(k) plan operates under a written plan document that outlines how it should be managed. Fiduciaries must strictly follow those rules unless they conflict with federal law.
5. Duty to Monitor Service Providers
If you hire third-party administrators, recordkeepers, or investment managers, you must regularly monitor their performance and fees. Hiring an expert doesn’t remove your fiduciary responsibility — you still have to ensure they’re acting in your plan’s best interest.
Legal Obligations and Potential Liability
The Employee Retirement Income Security Act (ERISA) governs 401(k) fiduciary responsibilities. Under ERISA, fiduciaries can be held personally liable for losses to the plan resulting from a breach of duty.
That means if you make a decision that harms participants — even unintentionally — you could be required to restore any losses and face legal penalties. Common fiduciary violations include:
-
Failing to monitor investment fees
-
Offering poorly diversified investment options
-
Using plan assets for business purposes
-
Delaying contributions to employee accounts
-
Not properly documenting plan decisions
How Business Owners Can Limit Fiduciary Liability
1. Partner with a 3(38) Investment Manager or 3(21) Advisor
Working with a qualified financial advisor or third-party fiduciary can offload some of your fiduciary responsibilities. A 3(38) advisor assumes discretion over investment decisions, while a 3(21) advisor provides guidance and recommendations but leaves final authority with you.
2. Keep Detailed Documentation
Always document meetings, decisions, and the rationale behind plan changes. Clear records help prove that you acted prudently and in good faith.
3. Conduct Regular Plan Reviews
Review investment performance, fees, and provider services at least once a year. Benchmarking your plan against industry standards helps ensure competitiveness and compliance.
4. Educate Yourself and Your Team
Fiduciary education can reduce risk and improve confidence in managing your 401(k) plan. Many financial advisors and plan providers offer complimentary fiduciary training sessions.
Why Fiduciary Compliance Matters
Beyond legal protection, strong fiduciary practices build employee trust. When workers know their retirement plan is managed responsibly, it improves morale, retention, and overall engagement.
Plus, maintaining compliance reduces the chance of costly audits or lawsuits — helping you focus on running your business instead of managing legal issues.
Final Thoughts
Being a 401(k) plan sponsor is both a privilege and a responsibility. Understanding and upholding your fiduciary duties not only protects you from liability but ensures your employees’ financial futures are in good hands.
If you’re unsure whether your plan meets fiduciary standards, or want to explore ways to reduce your liability, Cornerstone Portfolios can help you assess your current setup and implement strategies to strengthen your plan oversight.