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Who Runs Your 401(k) And What Do They Do?

Posted By Jim On 07/29/2006 @ 5:47 pm In Investing,Retirement | 4 Comments

This post was written by Cory Aldrich, a b5media blogger.

OK, let’s get some more basics up here. Today, we’ll talk about THEY. THEY are the people who run your retirement plan. THEY make most of the big decisions. THEY even make a fair number of the little decisions.

THEY put your contributions into the plan. THEY process any changes to the investments within the plan. THEY facilitate distributions from the plan.

THEY prepare and process forms. THEY prepare and deliver statements. THEY prepare and file the Form 5500 and other legally required reports.

THEY do a lot.

“Enough already!” you’re saying. “Who are THEY?”

Fine, I’ll get to the point. THEY are a number of different people and organizations all working together to run your employer-sponsored retirement plan. There are a bunch of different ways that THEY can divide the work, so I can’t cover every possibility. I will cover the more common members of THEY, starting with the two essential ones, the Trustee and the Plan Administrator.

Trustee
“The buck stops here.” That sums up the role of the Trustee. This is the person who has the ultimate responsibility, authority and discretion to manage and control the assets of a plan in the sole interest of the plan’s participants and beneficiaries. This means the Trustee’s first concern isn’t the company’s interests or even his own (except to the extent that he is himself a participant). The sole basis for Trustee decisions is the interest of all participants and beneficiaries. In most small and medium sized companies, the Trustee is an owner or officer of the plan sponsor. In some cases, this role of Trustee can be outsources to an outside institution.

Plan Administrator
The Plan Administrator is the person responsible for the administration and operation of the plan. This is very similar to the Trustee, and in most cases the two are the same person. Like the Trustee, this is a fiduciary role, which carries certain added legal responsibilities. And, like the Trustee, the Plan Administrator is often an owner of officer of the plan sponsor.

Plan Sponsor
The Plan Sponsor is, well, the employer (or employers) that sponsor the plan. Obvious enough, eh? Usually, this is your employer. If you belong to a union or similar organization, then your union might be the sponsor. In this case you have just the one retirement plan no matter which of the union employers you are currently working for. As I’ve already mentioned, the Trustee, Plan Administrator, and Plan Sponsor are very often the same person.

The other roles I’m going to describe are what I’ll call helper roles. While the Trustee and Plan Administrator have the responsibility for making decisions and running the plan, there’s nothing that says they can’t get some help. Instead of doing it all themselves, they can hire experts to manage particular aspects of the plan. The Trustee and Plan Administrator, then, are responsible for overseeing their work.

Attorney
You can’t get away from attorneys in the USA, and you shouldn’t when it comes to a retirement plan. The law the governs retirement plans is called ERISA, the Employee Retirement Income Security Act of 1974. ERISA is incredibly complex, and it is subject to frequent changes as Congress passes amendments, the IRS issues rulings, and the courts decide cases. A good attorney will keep the Trustee informed of these changes, so they can make wise decisions in your best interest as a participant.

Financial Adviser
Like a good attorney, a good Financial Adviser can be an invaluable resource to the Trustee. A Financial Adviser typically has two major roles. The first is to assist the Trustee in the creation and implementation of an Investment Policy Statement. This document outlines the process used to select the investment options made available within the plan. A good Financial Adviser means a good Investment Policy Statement, and that means a good selection of investments in the plan.

The second role is participant education. This applies to participant-directed plans more than trustee-directed plans, since you have both the privilege and responsibility of making your own decisions in the former. A good Financial Adviser will have a program of employee education available to plan participants, including personal consultations. The best Financial Advisers will also be a good source of information about how the plan works, as well.

Third-Party Administrator (TPA)
Brief disclosure: I work for a TPA by day, and have been in this field since 1997.

The TPA is the back-office for your plan. They handle most of the day-to-day operations of the plan, without holding any discretionary authority typically. They execute and implement the plan according to the written document. They process contributions, loan payments, distributions, transfer requests, etc. They prepare reports for participants, the Trustee, and the government. All of these things, however, are usually done without any real discretionary decisions. If there is a decision to be made, they go back to the Trustee or Plan Administrator.

One thing you should know: While a TPA does lots of stuff, they don’t necessarily talk to participants. Some prefer to stay in the back room, and remain “transparent” to the process. They want all contact filtered thru the Plan Administrator or someone else at the Plan Sponsor, like an HR or benefits director. Other TPAs include direct participant contact as part of their services. Even then, they are limited by the fact that they do not exercise any discretionary authority over the plan. They are just messengers for the provisions and processes already established. Something to keep in mind when you go looking for the right person to talk to.

Custodian
The Custodian is the financial institution that holds the plan assets. As a participant, you will rarely have any interaction with them. The possible exception: When you take a distribution from your plan, the check and 1099-R will probably come from the Custodian.

HR/Payroll Department
Finally, let’s not forget your own payroll department. They are often understaffed and overworked, because they don’t add anything directly to the bottom line. But, they are responsible for every form you complete and every 401(k) contribution you have deducted. They may be the folks you talk to first when you have a question, just because they work down the hall or across the floor from you.

Cory Aldrich lives, works and blogs from Dayton, OH. He works in the retirement plan industry as a Third Party Administrator (TPA).


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