What the “F” ? – Part 3 – Fiduciary

What the “F” ?
A four part series that will address important themes of plan management  

Thus far we have looked at some complicated “F”s in funds and fees, in today’s blog we are going to address one of the most overused and misunderstood “F”s in our industry: fiduciary. The basic definition of fiduciary is any individual or entity that has, or exercises discretionary control over the management of the plan or the plan’s assets. A plan may have one than one fiduciary and/or one individual serving in more than one fiduciary capacity. From there, the functional definition of fiduciary goes in several different directions.

When assessing whether or not you fall into a fiduciary role using the functional test you must consider the following: even with no expressed appointment or delegation of fiduciary authority if you are considered in control or procession of authority over the plan’s asset, management, or administration than you are considered a functional fiduciary. Many times this will include members of the Employer’s Board of Directors or Trustees, voting and non-voting, with power to exercise discretion and control. One important distinction to make is that the person who performs administrative ministerial functions, such as processing payroll, approving distributions or loans, or submitting data for testing, is not considered a fiduciary. In other words, the president of the company is usually a fiduciary because he or she has the discretion to implement plan decisions and to hire parties to assist in the administration of the plan; while a payroll clerk is not a fiduciary if he or she is processing the payroll in the 401(k) vendor’s website.

As a plan fiduciary, you may also be presented with opportunities to hire or appoint additional co-fiduciaries. There are different varieties of co-fiduciaries including 3(16), 3(21) , and 3(38) fiduciaries. A 3(16) co-fiduciary acts as the plan administrator and is responsible for managing the day-to-day operations of the plan. Some functions may include determining the eligibility of employees, maintaining all plan documents and records, providing annual notices, rendering decisions regarding participant claims, and fixing plan operational errors. This may be confusing since we have already determined that the individual within your company that provides many of these administrative functions like sending out notices and approving distributions is not a fiduciary; the difference is in that a named 3(16) fiduciary is an individual outside of your company that provides these administrative duties without consulting you, the plan sponsor. A 3(21) fiduciary is a paid professional who provides investment recommendations to the plan sponsor, but the plan sponsor retains ultimate decision-making authority and approves or rejects the advice of the 3(21) fiduciary. There is no discretion given to the 3(21) fiduciary. A 3(21) provides investment advice on a regular basis to the plan that the plan sponsor relies on to make a decisions pursuant to a mutual agreement or understanding (written or not) that is specialized to the plan for a fee. Finally, a 3(38) fiduciary is an investment manager in that the investment manager has discretion to make changes in the plan investment line-up or allocation without consent of the plan sponsor. A 3(38) must be appointed in writing by contract. The main difference between a 3(21) and a 3(38) is discretion. It is also important to note that even if you as a plan fiduciary hire a 3(16), a 3(21), and a 3(38), you still cannot absolve yourself of your personal fiduciary responsibility.

If you’ve made it this far in the blog, I’m sure it is clear to you why the definition of a fiduciary is anything but clear and you may be asking yourself why you should take the time to even bother with trying to understand your role and whether or not you are or are not a fiduciary. The reason understanding your role and acting properly as a fiduciary can be so important is that fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any plan losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. While this is very true and taken directly from the Department of Labor’s commentary on fiduciary responsibility, it can be hard for many plan fiduciaries to conceptualize because chances are you have not, do not, and will not ever know anyone who loses their home or personal assets over a fiduciary breach. Nonetheless, there are very real examples of plan fiduciaries who have cost their companies a significant amount of many and/or lost their job due to improper fiduciary management. Look no further than Caterpillar, Fidelity, Lockheed Martin, Intel, Boeing and State Farm for companies that have faced or are currently facing case action lawsuits involving the management of their respective 401(k) plans (not all cases have been settled, nor have all companies been found guilty).

Moreover, as a plan fiduciary you have the unique and important role of providing the greatest opportunity for retirement savings that most of your employees will have. By properly managing the plan, you are playing a vital part in helping your valued employees get to their retirement goals. Check out my next installment when we will look closer at this role you play in the ultimate “F”.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162

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March 15th – A Scary Day to Open the Mailbox

March 15th – A Scary Day to Open the Mailbox

Highly Compensated Employees Receiving Taxable Refunds
and Why This Type of Refund is NOT a Good Thing for Employees or Employers

mailboxToday, some of you may go to your mailbox and find a check waiting for you. This check may be anywhere from a couple of hundred dollars to a couple of thousand dollars. And on any other day, but today, you would probably be thrilled to find such a surprise awaiting you in a mass of otherwise junk mail. However today, March 15th, is the deadline to make 401(k) compliance testing refunds to avoid a 10% excise tax (to your employer); therefore, if you receive a check today (or in the next few days) from the company that recordkeeps your company’s 401(k) plan , then you have just received a 401(k) refund.

A 401(k) refund occurs when your company’s 401(k) plan fails its annual discrimination testing; the amount that is refunded is the amount that was needed to be taken out of the 401(k) account of each affected highly compensated employee in order to bring the test into a passing range. If you are an HCE that receives a refund, then you will also receive a 1099-R and you must report the amount as taxable income in the year in which the refund was received.

hce 1.pngThere are several annoying implications of receiving money out of your retirement plan. The first is that money that you intended to be set aside as tax deferred is now taxable at a time that is more than likely earlier than you would have liked. The second is the potential impact to your overall retirement plan in that any money that comes out of the plan early is lessening that which you had saved for retirement. Finally, we have found that there is a compounding negative impact on your desire to want to continue to participate in your company’s retirement plan when refunds are received in multiple years.

hce2.pngReady for the silver lining in this article? There are options that are available to retirement plans to correct the issue of refunds. Most of them involve examining the plan design to determine if there could be any modifications that would improve the likelihood of the plan passing testing. A Safe Harbor plan design would allow the plan to receive an automatic pass of the compliance tests that cause refunds. Adding an automatic enrollment option could give an immediate boost to participation numbers which could give added support to the testing calculations. Implementing a comprehensive education plan could bolster both participation and deferral percentages. These are just a few of the designs and your plan would have to be reviewed in detail to determine if one of these or potentially another solution would be right.

Need a better way to keep retirement contributions in your 401(k) plan? Want to improve your company’s plan for the HCE’s so you can attract and retain them? Contact me to discuss.   jamie@grinkmeyerleonard.com or 205-970-9088.

jamie kertis headshot2

Jamie Kertis, AIF®, QKA / Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 / Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162 / Fax: 866.774.9029
Jamie@grinkmeyerleonard.com / www.grinkmeyerleonard.com /  Find us on Facebook  / Follow my blog