The 401k plan administrator is an integral part of any 401k plan.
401k plan administrators – also known as 401 k service providers, 401 k third-party administrators (TPAs), or 401k recordkeepers – are responsible for the day-to-day operations of the 401k, and they make sure that everything runs smoothly.
In this article, we will explain:
- what is a 401 k plan administrator
- what are their duties and area of expertise
- what is a 401 k plan sponsor and other plan fiduciaries
- what are the alternatives for maximizing your savings account.
We will cover a plan sponsor vs plan administrator analysis and help you determine how can a 401k administrator help you with their services. Without further ado, let’s learn all about plan administrators.
Covering The Basics
Let’s cover the basic terms initially.
The ERISA fiduciary
The Employee Retirement Income Security Act (ERISA) is a federal statute that regulates most retirement plans (as well as the Internal Revenue Code). ERISA’s set of standards is often referred to as ERISA fiduciary duties.
The fundamental ERISA fiduciary responsibility is to act in participants and beneficiaries’ interests, provide benefits, and pay plan expenses.
The 401k plan
The 401k plan or an employee retirement plan is a retirement savings plan that allows employees to save money for their golden years. An employer sponsors the plan, and the employees contribute through payroll deductions.
The 401k plan is a fundamental part of accumulating capital for your retirement. It is a tax-deferred retirement account, meaning that the assets you put in it won’t get taxed until you cash them out.
401k plans offer you an excellent opportunity to save money for your retirement. If you’re lucky enough to have an employer that offers 401k matching, the plan will generate substantial returns on your savings.
Generally speaking, 401k plans are more affordable than other retirement accounts like Traditional IRAs or Roth IRAs. For those interested in cashing out their 401 k plan, we’ve already covered How to cash out your 401 k without quitting your job.
What is a 401 k plan administrator?
A 401k administrator is a specialist who manages the day-to-day administration of a 401k plan. They ensure to keep the retirement plan running smoothly and must be named in the plan document.
The employer’s retirement plan is overseen and managed by a 401 k administrator. Given the long list of responsibilities and liability risks, this responsibility is frequently outsourced to a third-party administrator (TPA).
The 401(k) plan administrator will typically have a team of professionals who help them with 401 k plan administration, including 401 k plan recordkeeper, 401 k plan trustee, 401 k plan custodian, 401k legal counsel, and others.
Plan administrator’s responsibilities
401(k) administrators have a long list of responsibilities. Each of these responsibilities is critical to the success of 401k retirement plans.
Plan administrator responsibilities include:
- Discussing with the employer the initial plan design, employee matching program, and profit-sharing options
- Assisting plan sponsors and customizing set up
- Overseeing the plan operation and approving the transactions, including employee contributions, employer matching, loans, and distributions
- Monitoring compliance with plan’s rules, law changes, and federal regulations, and making plan amendments when needed
- Filing the required plan notices – required forms by the Department of Labor and Internal Revenue Service, such as Safe Harbor notices, 1099-R, and 5500 forms
- Preparing the annual participant census
- Writing a Summary Plan Description for the plan’s participants and beneficiaries
- Discrimination testing and audit support
- Helping employees by increasing employer contributions or refunding top-earning workers
- Educating employees on how to participate, use benefits, and maximize savings
- Ensuring to maintain records, such as participant accounts records, plan documents, and plan administration
- Investing the plan funds and calculating associated fees.
How can a 401(k) plan administrator help me?
A plan service provider can help every company and small business make the most out of a retirement plan and upgrade employees’ benefits as a result.
If you are an employee, make sure to find your 401(k) plan service provider in the plan document – Summary Plan Description or on Form 5500. Feel free to ask for information about when the benefits will be paid, employer contributions, employee contributions, allowable plan contributions, and similar. They will provide you with up-to-date information in your best interest.
401(k) recordkeeper helps employers, too. If you are a company or a small business owner, you should consider hiring a plan service provider. They can provide a wealth of knowledge and expertise to ensure that your 401k plan is in compliance with the ever-changing regulations, laws, and rules. They can not make investment decisions for a fund, but they ensure that investments are in compliance with the company or small business goals.
Small businesses often hire an outside investment advisor, investment manager, or registered investment adviser to help them manage the plan’s assets. An investment manager can help you understand how your plan functions so that you know if it is performing well or not in comparison with other 401k plans. They will also help you design a plan that meets the needs of your employees and business.
The service agreement requires investment.
401(k) administrators charge various fees for their services, but the most common fee is an annual fee that ranges from $500 to $2000, depending on 401(k) plan size and the recordkeeper’s service agreement. 401k fees are typically included in your 401(k) plan expenses so that they will be deducted directly from your 401(k) balance. Larger companies tend to have lower per-participant costs due to economies of scale.
Critical players for defined contribution plan administration
There are key players in every 401 k plan – a plan sponsor, a plan administrator, a named fiduciary, a trustee, etc. It is in your best interest to understand their duties. Failure to coordinate plan amendments, reporting, and disclosure requirements between critical players can result in compliance failures and penalties.
Plan Sponsor (Employer) – outlines the plan to employees and offers it.
Named Fiduciary – ensures that the plan is carried out following the plan’s documentation and assists the plan sponsor. They are also in charge of approving transactions such as loans and distributions.
Plan Participants – ensure the administrator has access to their staff information and timely updates. Participants may pay some asset-based fees.
Custodian – protects the plan and plan assets.
Financial Advisor – provides investment advice and suggests asset diversification and investment planning.
Auditor (when required) – provides assurance that the plan’s financial records are correct.
Regulators regulate the plan sponsor’s fiduciary responsibilities and enforce plan-prohibited transactions as defined by the Employee Retirement Income Security Act (ERISA).
Plan Sponsor vs Plan Administrator
Many believe that these are terms are synonyms. On the contrary, these are two different roles with different responsibilities.
The plan sponsor is usually a business, a union, or an employee. ERISA also stipulates that the plan’s sponsor must choose an administrator. The entity in charge of the plan’s operation is a 401(k) plan administrator (and may also be called the Plan Named Fiduciary).
Plan sponsors and administrators are frequently the same people. However, there are vital distinctions between their responsibilities. While many decisions taken by plan sponsors do not require a fiduciary duty, administrators must adhere to fiduciary standards since many activities necessitate specialized knowledge of retirement plan regulations and the use of complicated recordkeeping systems.
These two roles cooperate to achieve ultimate success for all plan participants.
Is 401(k) the best savings account?
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Final Thoughts
Planning for the future is an important activity. We are responsible for the outcome, and it is in our interest to understand all about the 401(k) plan and participants.
We hope that this article helped you get to the bottom of the 401(k) plan administrator’s duties and that you know how they can help you maximize your savings account, all in compliance with regulations.
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