For many employees, participating in a 401(k) is straightforward. But to make things look easy, there’s a lot that goes on under the hood, from day-to-day administration to compliance requirements.
That’s where 401(k) administrators come in. Tasked with handling certain plan administration functions, an administrator may either be an internal member of the company or a third party.
Administrators and Fiduciaries
First, some terminology. A 401(k) administrator is tasked with administering an employer’s retirement plan. Given the long list of responsibilities and liability risks, this duty is often outsourced to a third party administrator (TPA).
Chances are that you’ve also heard the term “fiduciary.” Generally speaking, fiduciaries are individuals or entities entrusted with handling funds or other assets belonging to another party or making discretionary decisions over plan operation. When it comes to retirement plans, there are a few different kinds of fiduciaries, but we’ll concentrate on administrative fiduciaries here.
An ERISA 3(16) fiduciary is responsible and liable for the day-to-day administration of your plan - generally they have some type of discretionary control over the plan or plan assets. As we’ll later cover, this can include determining eligibility, processing 401(k) loans and distributions, handling employee notices, and more. Not all TPAs are necessarily 3(16) fiduciaries, and many will perform administrative functions but will leave the ultimate responsibility and fiduciary liability in the hands of the employer.
On a side note, another common 401(k) fiduciary is an ERISA 3(38) fiduciary, also known as the investment manager. The investment manager takes on the responsibility and liability for making investment decisions for the plan on the employer’s behalf, in the best interest of plan participants. Investment management is not part of plan administration, and plan sponsors may hire an external investment manager, in addition to their plan administrator. Alternatively, some bundled 401(k) plan providers will serve as both the 3(16) and 3(38) fiduciary. Gusto has entities that can serve as both the 3(16) and 3(38) fiduciary for eligible plans.1
Plan Administrator Responsibilities
Plan administrators run a company’s 401(k) plans behind the scenes. From the onset, the administrator is there to help your company structure its plan. Will you offer both traditional and Roth deferrals? Who’s eligible to participate? Depending on their level of involvement, an administrator may also advise you on plan design to help keep your 401(k) competitive and compliant. This can mean working with your company to design your profit sharing and/or matching program as well.
The following is a non-exhaustive sample of administrator responsibilities, but responsibilities may vary, including whether you have hired a TPA and your service agreement with the TPA:
Consultation on initial plan design
Preparation of required notices (Summary Plan Description, Safe Harbor notices) for participants and beneficiaries
Approval of transactions (loans, distributions, etc.)
Monitoring compliance with plan rules and federal regulations
Nondiscrimination and limit testing and audit support
Compliance filing (Form 5500, Form 1099-R)
Generation of annual participant census
Day-to-day employee communication
Once your company’s 401(k) plan is set up, there’s a lot that goes into maintaining it. That includes monitoring employee deferrals and distributions (or withdrawals) to keep them in compliance with both the plan's rules and federal regulations. Administrators also handle employee “status” changes. In other words, as employees gain or lose eligibility (e.g., join or depart the company), the administrator confirms those changes are reflected accurately.
Finally, while offering a 401(k) is a great way to set your business apart in a competitive talent market, doing so comes with a slew of reporting and recordkeeping requirements. And no surprise, administrators can be tasked with checking all the boxes. From performing nondiscrimination tests to preparing your Form 5500 and safe harbor notices, administrators work to keep your plans compliant with federal and state regulations. As rules change, they’ll need to update your plans accordingly as well.
Fees and Pricing
Making retirement “work” for any business, large or small, is a big job. So if you’re partnering with a TPA, how much does that relationship cost?
401(k) providers can charge a variety of fees including flat fees, asset-based fees, and transaction fees. These seemingly low fees can have a major impact on your savings, especially when compounded over time. As an example, if your plan currently has $100,000 in it, a 1% AUM fee would result in an additional $1,000 due each year.
With Gusto 401(k), Gusto Retirement Services, LLC offers plans with a transparent and predictable structure: a base fee with an additional per-participant fee, all charged monthly to employers.
For participants, Gusto Investment Services, LLC (“Gusto Investment Services”) charges a 0.25% account fee based on assets under management (AUM).2 This fee is for the 3(38) investment management services for the plan performed by Gusto Investment Services. Please see Gusto Investment Services’ ADV 2A Brochure for more information.
Unfortunately, depending on your provider, costs aren’t always apparent—they may be bucketed under other administrative expenses or line items in your invoice.
Investing in employees’ retirement shouldn’t be an aspiration exclusive to larger companies. While offering and administering a 401(k) plan may seem daunting, you don’t have to go it alone. Gusto Retirement makes it easy for your small business to offer competitive retirement benefits without the heavy lifting.
We handle plan administration for you, including compliance testing, recordkeeping, and reporting. That means less time worrying about filing a Form 5500 and more time focusing on your business. To see how Gusto Retirement makes it easier to give your employees the retirement plans they deserve, schedule a demo.
FAQs
What is a 401(k) plan administrator?
A 401(k) plan administrator is the person or entity responsible for running the day-to-day operations of an employer's retirement plan. This includes handling compliance, processing transactions, managing employee communications, and filing required government reports. The role can be filled by an internal employee, committee, or outsourced to a third-party administrator (TPA).
What's the difference between a 3(16) and a 3(38) fiduciary?
A 3(16) fiduciary is responsible for the day-to-day administration of a plan, including, but not limited to, processing loans and distributions, handling employee notices, and maintaining compliance. A 3(38) fiduciary (investment manager) is responsible for making investment decisions for the plan. These are separate roles and can be held by the same provider or different ones.
Does outsourcing plan administration remove liability from the employer?
Not entirely. Choosing a provider that serves as a 3(16) fiduciary transfers more of the day-to-day legal responsibility away from the employer. However, while outsourcing to a TPA can shift significant administrative responsibility, hiring someone to perform fiduciary functions is itself a fiduciary act — meaning employers retain some liability for selecting and monitoring their administrator.
What does a 401(k) plan administrator actually do on an ongoing basis?
On an ongoing basis, administrators monitor employee deferrals and distributions for compliance, handle eligibility changes as employees join or leave, perform annual nondiscrimination tests, prepare Form 5500 and safe harbor notices, and update the plan as IRS regulations change. They keep the plan running legally and efficiently behind the scenes.
Disclosures
Even where Gusto entities provide 3(16) and/or 3(38) fiduciary services for a plan, the plan sponsor remains the plan's named fiduciary and retains ultimate responsibility for the plan, including for prudently selecting and monitoring its service providers. Gusto's ability to perform recordkeeping, compliance, and fiduciary services depends on the plan sponsor providing complete and accurate plan, payroll (if not using Gusto Payroll), and participant information on a timely basis; delays or inaccuracies in that information may affect compliance, recordkeeping, and reporting outcomes.
¹ Material provided herein may contain content from Gusto, Inc. and its affiliates, each a separate entity with different regulatory requirements and standards. References to “our” or “we” refer solely to Gusto Retirement Services LLC (“Gusto Retirement” or “Gusto 401(k)”) unless otherwise specifically stated. The information in this material is for informational purposes only and is not intended to be an offer, recommendation, investment advice, legal or tax advice, or a solicitation to buy or sell any security.
Investment advisory services for Gusto's 401(k) product (when 3(38) fiduciary services are appointed) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. An assumed annual account fee of 0.25% is applied to assets under management and is deducted on a monthly basis. It's calculated at 1/12 of the annual stated rate based on the account balance on the last day of each month. See Form ADV 2A Brochure for more information regarding these fees.
2 Recordkeeping services for Gusto’s 401(k) and SEP IRA/IRA products are offered by its affiliate, Gusto Retirement Services, LLC. 3(16) plan administrative services are also offered by Gusto Retirement Services, LLC and only made available to clients who use the integration services available through Gusto’s payroll service. Gusto Retirement Services, LLC uses a third-party to provide custodial services.
