Offering a 401(k) plan is one of the impactful ways to recruit, retain and reward top talent for your company. But for plan sponsors, the responsibility goes beyond plan setup. Employers and 401(k) plan committee members take on significant legal duties, and failure to meet them can lead to a breach of fiduciary duty—a costly and damaging outcome.
With Employee Retirement Income Security Act (ERISA) litigation on the rise, it's critical for companies to understand their fiduciary exposures, the risks involved, and how to proactively protect themselves and their employees. In 2024 alone, ERISA-related excessive fee litigation surged by 35%, with plaintiffs aggressively pursuing claims against even small- and mid-sized plans.
What is fiduciary exposure?
Fiduciary exposure refers to the legal, financial, and reputational risks plan sponsors face when they fail to uphold their responsibilities under ERISA. If a fiduciary does not act in the best interests of plan participants, manage investments prudently, control plan costs or comply with ERISA regulations, they risk breaching their fiduciary duty.
The potential consequences can be significant, including: fines, lawsuits, personal financial liability, regulatory audits and reputational damage.
Who has fiduciary responsibility?
Several parties play critical roles in the management of a 401(k) plan, and many of them carry fiduciary duties under ERISA:
- Plan sponsors: Typically the employer, responsible for establishing and maintaining the retirement plan in compliance with ERISA.
- 401(k) committee members: Individuals from HR, finance, or leadership who make plan-related decisions, including investment oversight and service provider selection. These members act as fiduciaries and must operate in the best interests of participants.
- Investment managers: Professionals with discretionary authority to select and monitor the plan's investment options.
- Plan administrators: Responsible for day-to-day operations and legal compliance.
If you have discretionary authority over any aspect of the plan, you are legally considered a fiduciary—and you're responsible for upholding ERISA standards.
Despite this, many plan sponsors mistakenly believe that hiring a third-party administrator (TPA) or financial advisor removes their fiduciary obligations. While these partners can support administration and investment decisions, they do not eliminate the sponsor's ultimate fiduciary responsibility. Oversight, documentation and prudent judgment must still come from those charged with plan governance.
What duties must fiduciaries fulfill?
ERISA outlines several core fiduciary responsibilities:
- Duty of Loyalty –Act solely in the best interest of plan participants and beneficiaries.
- Duty of Prudence – Make decisions with the care, skill, and diligence of a reasonably prudent expert.
- Duty to Diversify – Minimize risk by offering a diversified selection of investment options.
- Duty to Follow the Terms of Plan Documents – Operate in strict accordance with the plan's governing terms and ERISA law.
- Duty to Control Costs – Ensure all plan fees and expenses are reasonable, necessary, and fully disclosed by the Plan Sponsor.
Failure to meet any of these standards could be deemed a breach of fiduciary duty—and could expose individuals and plan sponsors to financial liability, litigation or enforcement actions.
Common pitfalls that lead to breaches of fiduciary duty
Fiduciary missteps often stem from inaction and lack of awareness – not intent. But under ERISA, lack of awareness is not a defense. Here are frequent issues that get plan sponsors into trouble:
- Inadequate investment monitoring
Fiduciaries must regularly review plan investment options and remove or replace funds that are no longer prudent. Failing to do so may constitute a breach of fiduciary duty under ERISA.
- Failure to benchmark fees
Plans must periodically compare provider and fund fees to industry standards. Excessive or hidden fees are one of the leading causes of fiduciary breach litigation.
- Assuming vendors take on fiduciary liability
TPAs, advisors, and recordkeepers may assist plan sponsors with administration and investment selection, but their involvement, in and of itself, doesn't reduce a plan sponsor's fiduciary obligations under the law. That said, plan sponsors can significantly mitigate their fiduciary exposure by properly engaging and monitoring service providers who are explicitly hired to perform specific fiduciary functions—such as a 3(21) co-fiduciary, 3(38) investment manager, or 3(16) administrative fiduciary.
- Lack of documentation
If fiduciary processes and decisions aren't documented, you'll have little defense in the event of an audit or lawsuit.
How to reduce your fiduciary risk
Establish and empower a 401(k) committee
Create a formal retirement plan committee with a charter, scheduled meetings, and training. Include key agenda items such as fee reviews, investment monitoring, participant outcomes, and compliance updates.
Benchmark plan fees and providers
Compare administrative and investment costs to similar-sized plans using independent data. Be sure to document the benchmarking process and any decisions that follow.
Stay current with legal and regulatory updates
New laws like the SECURE Act and evolving IRS/DOL guidance can change your responsibilities. Keep your committee informed and your plan aligned.
Offer participant-centric features
Tools like automatic enrollment, automatic escalation, and Roth options not only improve participant outcomes—they also demonstrate prudent fiduciary decision-making.
Invest in participant education
Education is part of your fiduciary responsibility. Offer resources that help employees make informed investment decisions, including workshops, one-on-one sessions, and financial wellness programs.
Document every decision
Keep detailed records of all committee meetings, service provider reviews, plan changes, and fiduciary discussions. Good documentation supports transparency and accountability in your fiduciary process.
Engage a specialized advisor
Partnering with an experienced fiduciary advisor can enhance plan design, improve participant outcomes, and reduce the risk of fiduciary missteps. A qualified advisor can help with compliance, investment reviews, and industry benchmarking.
Take action today to reduce risk and protect your plan
Reducing your risk of a breach of fiduciary duty isn't just about legal compliance—it's a path to better business performance. A strong, well-managed retirement plan fosters employee trust, improves retention, and contributes to long-term financial security. Fiduciary compliance, when done right, can become a competitive advantage.
Here are a few questions to ask yourself:
- Are you confident that your processes and procedures for managing your plan's investment lineup, fees, and administration would withstand scrutiny under ERISA's "prudent expert" standard?
- Do committee members and other plan decision-makers understand their fiduciary responsibilities under ERISA—and the consequences of failing to meet those obligations?
- Are you regularly benchmarking your plan's fees and provider costs to meet your fiduciary obligation to ensure fees are reasonable under ERISA and DOL guidance?
If you're unsure, it's time to take a closer look.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
