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Your 401(k) Shouldn't be Risky Business

A guide to managing fiduciary duties and risks for employers and administrators

In this section, you'll see that there are big benefits of leveraging an ERISA 3(38) investment manager to handle the investment aspects of your plan. It's pretty easy to do, doesn't need to cost more, and will minimize key business risks associated with your 401(k).

Understanding 401(k) fiduciary duties

Who is responsible?

Offering a 401(k) is a great benefit for a business and its employees, but more often than not, business owners and administrators are unaware of at least some of the duties they're required to manage and the fiduciary role they take on. Moreover, employers are often unclear if any of their 401(k) providers share in the duties and risk.

Who typically IS

Who typically IS NOT

These can be the same person or many at your company:

  • Business owner(s)
  • Employees that manage the plan for your company
  • Named trustee at your company
  • Named investment fiduciary at your company


Your plan service providers are generally not responsible:

  • Broker reps, insurance agents and financial consultants
  • Recordkeepers and directed trustees
  • Attorneys and actuaries
  • Accountants

While many providers will provide investment "suggestions" and other support, most take on no duties or fiduciary risk, and the employer and supporting staff are on their own. For example, it's common for the owner and/or designated employees for your company plan to be responsible for selecting and reviewing the investment options offered in the plan.

Many 401(k) providers tout their investments and expertise, yet will take no responsibility, let alone a fiduciary role, in supporting your plan's investment roster. Rather, these risks and responsibilities lie squarely on their clients' shoulders – many who aren't financial experts, don't have the time to be, and most importantly, don't want any part of these risks.

Three big reasons to care

Besides that it's always a good idea for a provider to have the same goals as its customers, why is this so important? The reasons are pretty simple and compelling:


Everyone wants a great retirement benefit at your company and having a well-run and supported plan is essential to the goal.


The employer and associated employees are personally liable for breaches and must make good for plan losses.


Legal actions by employees against your company may arise for not managing core responsibilities prudently.


Investment News
New targets for lawsuits over 401(k) fees

"A group of fewer than 30 employees at a small company in Kansas has filed a lawsuit against the investment adviser, record keeper and custodian for its $2 million 401(k) plan, alleging that the trio of plan providers caused participants to pay 'secret' and 'excessive' fees."

~ Employees name investment adviser in 401(k) suit, by Mark Bruno, July 19, 2009.


Your eight core duties

There are eight core duties that help ensure you run the 401(k) plan in your employees' best interest, and keep your plan safe and performing well for your company. This chart highlights the "big eight" with a few insights on managing them:

Your eight core duties
Eight core duties General insights
1. Employees' best interest first and control administration expenses Diverse investments, easy access, guidance materials and low costs
2. Sound decisions (Prudent Man rule) Weigh your decisions (e.g. follow an Investment Policy)
3. Diversify investments to reduce risk of large losses Cover major asset classes, manage in line with an Investment Policy
4. Run the plan in accordance with how it was set up Run it with the options you chose and follow the document; amend as needed
5. Know what co-fiduciaries manage and monitor Review assets and payroll submissions; look for large dips in balances
6. Hold assets in jurisdiction of US Courts Typically not an issue with most US 401(k) providers
7. Don't tamper with assets for any business need Illegal — not an option even if you intend to pay it back
8. Purchase a fidelity bond of 10% of funds up to $500K maximum Provides some insurance if a breach occurs


The first three core duties are often the area where the greatest risks lie, as well as the areas the company can do the most to mitigate. With regards to putting your participating employees' best interests ahead of the company's and control administration expenses, too often employers think they have a low-cost plan as their company is paying little of the administration fees themselves.

Yet these fees have been pushed down to participants and frequently result in fees exceeding two percent or more of each participant's 401(k) account. This is particularly more common in small and mid-size company plans. A very small percentage can be reasonable; anything else is a risky move. Unfortunately, most employers aren't aware of exactly how much is pushed down to determine if it's reasonable or excessive.

Mitigating risks and improving your 401(k) is easy

The great news is that the simple management of costs and establishing or improving investment management practices for your plan doesn't take a ton of time and can make a big difference in helping employees build a bigger nest egg in their retirement accounts. And perhaps more important, it doesn't have to cost any more to outsource the investment management and further reduce or even eliminate this fiduciary exposure. This also eliminates any need to buy fiduciary insurance that some 401(k) providers try to sell as an add-on.

Here are three steps that can greatly minimize your business risks:

Step 1: Use a provider that takes on the investment management role for your plan.

Specifically, select what is called an ERISA 3(38) investment advisor and let the advisor manage the fund roster and any model portfolio allocations for your company's 401(k) plan. They will install an Investment Policy, and as long as it is focused on cost controls and diversification, you are well ahead of the pack and following a Department of Labor (DOL) best practice with the Policy.

Investment policy matters

Having an Investment Policy helps ensure a good framework is in place so that sound decisions can be made and are easily defendable regarding the investments offered in your plan.

Investment options need to cover major asset classes across stocks, bonds and cash. Model portfolios that automatically diversify investments to varying degrees based on various risk tolerances and time horizons are good to offer. This again is where an Investment Policy can help you stay focused


Step 2: Run your plan in line with ERISA 404(c) rules.

This offers you limited liability relief for losses an employee could experience with their investments based on their own decisions and direction. Download our 404(c) checklist to get a good sense for best practices. Most providers should be supporting 404(c), just ensure it is being done well.

Step 3: Put in place a Qualified Default Investment Alternative (QDIA).

A QDIA is for employees that don't take active control of their investing in your program. The employee may have money in their account from an employer profit share, match, IRA rollover, or auto-enrollment situation and simply never logged on to direct how he or she wants to invest these monies. Putting the money in a stable fund or money market does not meet the requirement but has been a common practice. Please call us if you need help in determining what a good option will be for your company.

Make sure you have the right provider supporting your plan

Here are three questions you can ask your provider, and if you're not getting the right answers across the board in a timely manner it's probably time to get serious about switching providers for everyone's sake.


What are my employees' all-in fees?
These should be less than one percent and will include more than just the fund expenses; make sure you get them all!


Will you, or can you, have an advisor serve as an ERISA 3(38) investment advisor on my plan for no additional cost?
FYI – don't get confused; 3(38) lowers your investment management risks, a 3(21) advisor does not. The focus of 3(21) is more on participant investment advice.


Can you provide a recommendation for an Investment Policy for my company that focuses on low fund expenses, diversification and long-term investment performance?


How ShareBuilder 401k can help

ShareBuilder 401k is an ERISA 3(38) investment advisor that serves as fiduciary on 401(k) plans for all our clients. We establish an investment policy built on an investment philosophy of diversification, performance, and lowcost, and ensure QDIA selections are in place for your plan. As we are not a fund provider, we have an unbiased approach to the investment line-up we offer to our clients.

ShareBuilder 401k provides an innovative employee guidance program as part of our 404(c) support. Our videos, guides, employee account review emails and more help to drive the engagement and knowledge you want your employees to have in saving for retirement.

Capital One Advisors Investment Committee advantage

To provide you with a great investment line-up and to manage plan risks, the Capital One Advisors Investment Committee oversees the investment options available in our plans along with managing the make-up of the five model portfolios (from conservative to aggressive). The committee consists of eight investment professionals including four CFAs (Chartered Financial Analyst).

To assist in our analysis, we use a model from ASI employing a Markowitz mean-variance technique designed to produce the highest expected return given the variable constraints (e.g. loss limits, historical returns, etc.) for each model portfolio. With this and other data, the investment line-up and model portfolios are managed in line with the ShareBuilder 401k Investment Philosophy and Policy. Essential policy objectives are asset diversification, performance, and keeping fund expenses low.

In a nutshell, this means that we take this role very seriously. It's a service few providers offer and we automatically include it in our pricing. We are here to provide you superior investment support and help you and your employees build a meaningful nest egg come retirement.

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