Pevita Pearce
Certified Public Accountants (CPAs) who work closely with small businesses often find themselves intimately involved with their clients’ 401(k) plans. This engagement typically spans multiple touchpoints throughout the year, from reviewing employer contributions reported on tax returns to analyzing payroll files that detail employee deferrals. Many CPAs also serve as the primary reminder for business owners when the annual Form 5500 filing deadline approaches. Given this consistent interaction and the inherent trust small business owners place in their CPAs for financial guidance, these professionals are uniquely positioned to ask a question that many business owners have never been asked: "Who is the Named Fiduciary of your 401(k) plan?"
For many years, a significant disconnect has existed between the legal requirements of retirement plan administration and the practical understanding of small business owners. Russell McNorton, founder and CEO of Admin316 and author of "Who Is Your Named Fiduciary? The 401(k) Responsibility You Didn’t Know You Had, and What It’s Costing You," highlights this pervasive issue. "In my experience working with retirement plans since 1997," McNorton states, "most owners I ask this question of answer by naming a vendor. They’ll mention the recordkeeper, the investment advisor, or the third-party administrator (TPA). However, when we look at the actual plan document, the Named Fiduciary is usually someone else entirely." This discrepancy, McNorton explains, can have significant implications for a plan’s compliance and the owner’s personal liability.
The Legal Mandate: Understanding Fiduciary Responsibility Under ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is the cornerstone legislation governing private-sector employee benefit plans, including 401(k)s. Section 402(a) of ERISA unequivocally requires every retirement plan to designate one or more fiduciaries who possess the authority to control and manage the operation and administration of the plan. In the context of most small business 401(k) plans, the adoption agreement—the foundational document that establishes the plan—typically names the employer as the Named Fiduciary. Furthermore, this same document often designates the employer as the Plan Administrator under Section 3(16) of ERISA. This role carries specific responsibilities, including the crucial tasks of issuing notices to participants, determining eligibility for plan benefits, processing distribution requests, handling claims, maintaining records, and ensuring the timely filing of the annual Form 5500.
The implications of this legal framework are substantial. A Named Fiduciary is legally obligated to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to them. This includes the duty to act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
Uncovering the Named Fiduciary: A CPA’s Role in Plan Diligence
For CPAs aiming to provide comprehensive service to their small business clients, confirming the identity of the Named Fiduciary is a straightforward yet vital step. This process does not require extensive technical expertise but rather a systematic review of key plan documents. The critical documents to request are the signed adoption agreement and every executed amendment thereto. It is important to note that the Summary Plan Description (SPD) or provider-generated "plan highlights" are generally not sufficient for this purpose, as they often lack the precise legal designations found in the core plan documents. If a client has misplaced these documents, their TPA is typically responsible for maintaining them and should be able to provide them. The promptness with which these documents are furnished can also offer a subtle indicator of how diligently the plan is being governed.
Once obtained, the task involves locating the specific lines within these documents that identify the Named Fiduciary and the Plan Administrator. The language used is precise, and it is essential to record the exact wording. As McNorton observes, "In most small plans, both the Named Fiduciary and the Plan Administrator are identified as ‘the company’ or a similar general designation referring to the employer."
A comparative analysis with the Form 5500 filing provides further insight. Line 3a of this annual report identifies the plan administrator. Crucially, an individual at the client’s company signs this return under penalty of perjury, attesting to its accuracy in their capacity as administrator. McNorton points out a common point of confusion: "Many owners sign the Form 5500 because their TPA sent it over for signature, without fully connecting their signature to the legal role of Plan Administrator that it represents." This signature effectively confirms their acceptance of the responsibilities associated with that role, regardless of whether they fully understand them.
If a client believes a third-party vendor has assumed either the Named Fiduciary or Plan Administrator role, it is imperative to request written documentation of this appointment. This would typically involve a formal written appointment from the employer and a signed acceptance from the provider. McNorton emphasizes a critical distinction: "A service agreement that merely describes the provider’s duties does not automatically confer a fiduciary role. In fact, many TPA and recordkeeping agreements explicitly state that the provider performs ministerial services at the employer’s direction and is not acting as a fiduciary." Without this explicit, written delegation and acceptance, the fiduciary responsibility, and the associated liability, remains with the employer.
Navigating the Landscape of Outsourced Responsibilities
The complexity of 401(k) plan administration often leads small business owners to seek assistance from external service providers. ERISA permits the delegation of certain fiduciary functions, offering flexibility in how plans are managed. For instance, a Section 3(38) investment manager can assume discretionary authority for selecting and replacing investment options within the plan. A Section 3(21) advisor, while providing investment recommendations, leaves the ultimate decision-making authority with the employer. Providers can also be appointed as Section 3(16) Plan Administrators, taking on specific administrative functions as outlined in their service agreements. Similarly, an independent fiduciary can be formally appointed to act as the Named Fiduciary.
However, regardless of how many functions are outsourced, certain fundamental responsibilities remain with the employer. These non-delegable duties include the prudent selection of each service provider, ongoing monitoring of their performance, furnishing them with accurate and timely information, and making informed decisions about the continuation of these service arrangements. The duty of monitoring is frequently overlooked, a point underscored by the Supreme Court’s ruling in Tibble v. Edison International (2015), which affirmed that fiduciary monitoring is a continuing obligation.
The accuracy of information provided to plan vendors is an area where CPAs can offer significant value. When a provider operates using compensation data that does not align with the plan’s definition of compensation, the resulting calculations, while seemingly correct, may not adhere to the plan’s governing terms. Issues such as late deposit of employee deferrals, missed eligibility dates for new employees, or the exclusion of bonuses from plan compensation often originate from payroll data controlled by the employer. Since CPAs routinely review this data, they are ideally positioned to identify and rectify such discrepancies before they escalate into compliance failures.
The Impact of Plan Fees: A Critical Review
A thorough understanding of plan fees is another crucial aspect of fiduciary responsibility. McNorton’s extensive research provides compelling data on this front. In a review of 48,944 plan-year 2024 Form 5500 Schedule H filings, he observed a wide variation in administrative costs. While this sample tends to skew towards larger plans, the trends are illustrative. The median plan incurred $162 per participant in administrative costs, equating to 27.0 basis points. For plans with 25 to 99 participants, the median cost rose to $364 per participant, a significant increase compared to the $104 per participant for plans with 500 or more participants. Notably, among plans with fewer than 500 participants, 30.6% paid more than double the median cost.
ERISA does not prescribe a specific fee ceiling. Plans may incur above-median costs for legitimate reasons, such as unique plan features or specialized services. However, the critical question that regulators or potential plaintiffs’ attorneys will pose is whether someone responsible for the plan reviewed these fees and documented the rationale for their reasonableness. When the employer, as the de facto Named Fiduciary, is unaware of their responsibility, this essential review process is often absent, leaving the plan vulnerable to excessive or unreasonable fees.
Initiating the Dialogue: A CPA’s Pathway to Enhanced Client Service
CPAs do not need to assume the role of plan fiduciary themselves to effectively assist their clients. In fact, informally taking on such a role without proper documentation and acceptance is ill-advised and can create personal liability. Instead, a few targeted questions during year-end client meetings can serve as an excellent starting point for a crucial conversation. These questions might include:
- "Who is specifically named as the Named Fiduciary and Plan Administrator in your 401(k) plan documents?"
- "Has any individual or entity formally accepted a fiduciary role in writing for your plan?"
- "Who is responsible for reviewing your plan service providers and their associated fees, and when was this review last conducted?"
- "Is there a written record of these reviews, including the decisions made and the basis for those decisions?"
If a client can confidently answer all four of these questions, it suggests their plan is likely operating in a reasonably compliant manner. However, if there are gaps in their responses, the immediate next step should be to formally designate a person or committee to fulfill these roles. This designation should be documented in writing, a review schedule should be established, and meeting minutes should be kept to record all deliberations and decisions. The plan’s ERISA counsel, investment advisor, or TPA can provide invaluable assistance in navigating the necessary paperwork to formalize these appointments and establish robust governance procedures. By taking these proactive steps, clients will have a clear record demonstrating who is accountable for plan oversight and what actions have been taken to ensure its proper administration, ultimately safeguarding both the plan and the business owner.
The implications of this proactive approach extend beyond mere compliance. A well-governed 401(k) plan fosters greater participant trust and engagement, ultimately contributing to a more secure retirement for employees. For the business owner, understanding and fulfilling their fiduciary duties mitigates the risk of personal liability and ensures that the retirement plan serves its intended purpose as a valuable employee benefit and a strategic component of business success.
