3 Steps to Outsource 401(k) Fiduciary Liability for Business Owners

Offering a 401(k) plan is a great way to support your employees, but it also comes with legal responsibilities that many business owners don’t fully understand. If you’re not careful, you could be personally liable for mistakes in how the plan is run or how investments are chosen.
The good news? You can outsource much of that risk. Here’s how:

Step 1: Know Your Fiduciary Liability

If you offer a 401(k), you’re likely a fiduciary under a federal law called ERISA (Employee Retirement Income Security Act). That means you’re legally responsible for making smart decisions for your employees—like choosing good investments and running the plan properly.
Some 401(k) service providers can offer help sharing an employer’s fiduciary liabilities, but not all providers are the same. To understand how much liability is being shared by your 401(k) service providers, ask for the fiduciary details in writing and double-check you’re getting the coverage you need.

What to do:

• Read your contracts carefully. Look for language about fiduciary responsibility. If it’s missing or vague, you may be carrying more risk than you think.
  
• Get educated. Check out resources like TPSU or Fisher\SMB’s fiduciary services to learn what being a fiduciary really means.

Step 2: Outsource the Risk

There are two main areas of 401(k) liability: administration and investments. You can outsource both.
Administrative Fiduciary Help
That includes tasks like preparing statements, processing contributions/distributions, testing for compliance, and preparing reports required by the IRS and DOL. A 3(16) administrator can handle these for you. You still need to monitor them, but they take on the day-to-day work.
Investment Fiduciary Help
Investments are the #1 reason for 401(k) lawsuits. You can outsource this risk in two ways:

• 3(21) Advisor – Gives advice, but you make the final call. You still carry the legal responsibility (co-fiduciary).
  
• 3(38) Investment Manager- Makes investment decisions for you. They take on the liability (full fiduciary). Note: A 3(38) investment manager takes on fiduciary responsibility for investment decisions, but plan sponsors still retain oversight duties and are responsible for selecting and monitoring all providers.

While 3(21) fiduciary services tend to be more widely offered, Fisher\SMB offers both, and 3(38) is only an additional fraction of the cost for full mitigation of liability.

Step 3: Keep an Eye on Your Plan

Even if you outsource, you still need to monitor your plan and your providers. ERISA says you must make sure everything is being done in your employees’ best interest.
Here’s how:

• Monitor your providers. Make sure that the plan is being administered correctly, that fees are kept reasonable, and that you mitigate conflicts of interest.
• Watch for conflicts of interest. For example, a provider might push their own investment products or bundle services to get more business.
• Ask for an ADV2 document. This report shows any conflicts of interest. If your advisor can’t provide it, that’s a red flag. (Ask for a new copy yearly to review.)
• Document everything. Keep records of contracts, reviews, and disclosures—like the 408(b)(2) fee disclosure. This helps protect you if questions ever come up.

Protect Your Business, Decrease Your Fiduciary Risk

Managing a 401(k) doesn’t have to be risky. By understanding your responsibilities, outsourcing smartly, and staying involved, you can protect your company and your employees. The best way to manage liability is to face it head-on.

Want help? Fisher\SMB offers full fiduciary support, including 3(16), 3(21), and 3(38) services. Let’s make your 401(k) safer and easier to manage.