401(k) Tips

Who is a 401k plan administrator?

Managing a 401(k) plan requires a host of administrative professionals. Find out who is a 401(k) plan administrator and their responsibilities in a 401(k) plan.

3 min read

Retirement plans are required to follow certain guidelines provided by the IRS, and they must comply with all plan rules and federal regulations. A 401(k) plan must balance the role of offering retirement saving services to its participants, and the role of sponsoring and administering a 401(k). A plan administrator is one of the parties involved in managing the 401(k) plan.

A plan administrator is an entity that is responsible for the day-to-day operations of a 401(k) plan. They are often a third-party contractor with the knowledge and requisite skills of managing a 401(k) retirement plan. As a fiduciary, the plan administrator is required to act in the best interest of the plan participants, and not the employer that hires them.

Who is the plan administrator?

A plan administrator is responsible for administering a 401(k) plan on behalf of its participants. The administrator has a fiduciary duty of acting in the best interests of the plan participants to safeguard their retirement money. Due to the demanding responsibilities of plan administrators, the role of plan administration is often outsourced to an external third-party administrator. However, small companies may keep the plan administration duties in-house to save costs.

Although the plan administrator does not make investment decisions of the plan, they ensure that participant funds are allocated to investments based on the investor's preferences. They ensure that employees' contributions are within the IRS limits and that the individual 401(k) accounts are properly managed.

What does a Plan Administrator Do?

A plan administrator is responsible for the regular operations of the retirement plan’s activities. Some of the functions that a plan administrator is required to perform include:

Plan design- the plan administrator consults with the employer on how the plan should be structured.

Monitor compliance-As regulations change, the plan administrator ensures that the 401(k) complies with federal regulations and the plan rules.

Authorize transactions: If you request a 401(k) loan or distribution from the 401(k) plan, the plan administrator must approve these transactions.

Perform tests- the plan administrator must perform routine tests to ensure fairness and equity among participants.

Filings and disclosures: the plan must make periodic statutory filings and disclosures required by regulators. Some of these filings may include Form 5500, Form 1099-R, and Safe Harbor notices.

Making payments to beneficiaries- the plan administrator is required to make scheduled payments to beneficiaries who inherit a participant’s 401(k) money.

Employee communication- the plan administrator responds to participants’ questions and concerns. They also send periodic account statements to the plan’s participants.

Plan Administrator Fees and Pricing

Most plan administrators charge a flat fee to employers and a per-head fee to plan participants. They may also charge additional 401(k) fees for other services like distributions, 401(k) loan processing, plan termination, and rollovers.

For example, a plan administrator may charge $2000 annually to the employer for plan management, and an additional 0.05% fee on assets under management to employees. The employer may decide to pay the plan administrator's fee or pass it to employees. However, most employers opt to bear this cost for the tax benefit if it is a deductible expense and to keep plan investment costs as low as possible.

When the employer passes the cost of plan administration to employees, the cost may be borne by employees as a flat fee or as an asset-based fee. For flat fees, participants will see a recurring cost on the monthly or quarterly account statement. However, asset-based fees may or may not be visible to employees in their account statement, since they may be added as part of the mutual fund expense ratio.

Who is a 401k plan sponsor?

A 401(k) plan sponsor is the entity responsible for establishing and maintaining the 401(k) plan for the company and its employees. Most often, the employer is the plan sponsor, but other entities like unions could also be 401(k) plan sponsors.

The plan sponsor establishes the plan, determines plan membership requirements, and makes contribution payments to the plan. They must be up-to-date with any changes to retirement plans, and make any required amendments to the plan.

Plan sponsors are responsible for outsourcing plan management to plan administrators, investment managers, and trust companies.

Who is a 401k trustee?

A 401(k) trustee is a party that has the fiduciary responsibility to ensure plan assets are managed in the best interests of the plan participants. They are appointed by the plan sponsor, and their names are included in the registration of the plan accounts.

As a fiduciary to the plan, the trustee can exercise discretionary authority over the management of the plan assets. Typically, the trustee can be held responsible for the misuse of plan assets.

Who is a 401k custodian?

A 401(k) custodian is an entity hired by the trustee company to handle the buying and selling of investments and keep custody of investment assets. The work of the custodian is documented in a service agreement with the plan administrator, but the trustee maintains control over the actions of the custodian.

Some of the services provided by the custodian may include recordkeeping services of contributions, investment options, plan distributions, etc. However, the 401(k) custodian does not make investment decisions and has no inputs on how assets are invested.