401(k) Plan Administrator Responsibilities
There are several parties involved in running a 401(k) plan, and each member of the team has a clearly defined set of responsibilities that they must fulfill in order for the plan to be compliant and functional.
One of the key players in any 401(k) plan is the plan administrator, which has a fiduciary duty to oversee the plan’s operations and perform or oversee the day-to-day functions of the plan, such as reallocating funds for a participant at their request, buying and selling shares of the investments inside the plan for participants and sending out periodic statements to all plan participants.
The administrator could be the employer itself, a team of employees, a third party, or a company executive.
The majority of plan sponsors enlist the help of a third-party plan administrator that specializes in this area because of the complexities that are involved in maintaining a 401(k) plan.
Ultimately, the plan administrator has a fiduciary duty to ensure that all of the plan’s functions and operations fall within the guidelines laid out in the plan documents.
There are also several other tasks that the plan administrator performs, such as:
- Monitoring the plan’s strategies (such as investment strategies, etc.)
- Acts as the record keeper for the plan
- Prepares and issues IRS Form 1099-R to plan participants who take a distribution from the plan during the previous year
- Prepares the annual census of all plan participants
- Analyzes the plan at the end of each year to ensure that all top-heavy and nondiscrimination rules are being adhered to, along with any other items that require compliance scrutiny. This includes the Actual Deferral Percentage test (ADP) and the Actual Contribution Percentage test (ACP). These tests ensure that the highly compensated employees of the company are not benefitting excessively in relation to the rest of the employees. If the plan fails either of these nondiscrimination tests, then the administrator is charged with the task of bringing the plan back within compliance guidelines. This could be done by either reducing the contributions of the highly compensated employees or making a corporate nonelective contribution for the rest of the employees.
- Prepares, signs and submits Form 5500 to the IRS on an annual basis. This form is essentially an annual report to the government breaking down the plan’s vested benefits, deceased participants, compliance data, and funding details. The IRS can then look at this information and determine the status of the plan’s operations and financial condition.
- Obtains fidelity bonding if necessary
- Oversees loans taken from the plan by participants. The administrator must ensure that all loans that are made fall within IRS guidelines plus any additional specifications listed in the plan document. This includes ensuring that the plan participant qualifies for a loan and that the participant’s account balance is adequate enough to provide a loan and those loan repayments are made in a timely fashion. The administrator must also deal with any loan on which the participant has defaulted. It must also adequately document all hardship withdrawals
- Educates investors on the features of the plan, such as the vesting provisions and schedule and any other plan-specific features
Fiduciary Duty Defined
Fiduciary duty refers to acting in a capacity that is solely in the best interest of the client (in this case, the sponsor and participants of the 401(k) plan) irrelevant of all other factors.
A fiduciary is in a position of great trust, and a fiduciary is expected to adhere to strict rules regarding how it can act and what it can do so that the client’s interests are always put ahead of anything else.
The Plan Administrator’s Fiduciary Duty
One of the key aspects of the administrator’s fiduciary duty is to monitor the service providers to ensure that they are acting properly and implementing adequate rules and procedures that guarantee financial safety and privacy to all plan participants.
The administrator has the authority to replace a service provider if they do not use adequate safeguards to prevent such things as identity theft and other forms of fraud.
401(k) Plan | A Complete Beginner's Guide
The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k).
Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.
Traditional 401(k) vs Roth 401(k)
The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978.
With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn.
Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006.
Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free.
Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings.
Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.
Contributing to Your 401(k) Retirement Plan
Contributing to a 401(k) plan is traditionally done through one’s employer.
Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion.
If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade.
If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion.
To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn.
With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them.
Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire.
If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term.
You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket.
On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true.
In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up.
Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change.
A smart move may be to hedge your bets and divide your contributions between the two types of IRAs.
If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each.
In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other.
When you do decide which avenue to take, make sure to thoroughly evaluate your decision.
Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible.
Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky.
You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.
Pension vs 401(k)
If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement.
There is typically no option to grow this amount, but it also does not require any financial investment from the employee.
Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer.
401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.
How Much Should I Contribute to My 401(k)?
Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k).
There are limits on how much you can contribute to it that are outlined in detail below.
There are two methods of contributing funds to your 401(k).
The main way of adding new funds to your account is to contribute a portion of your own income directly.
This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)).
The system mandates that the majority of direct financial contributions will come from your own pocket.
It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return.
The second method comes from deposits that an employer matches.
Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee.
However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan.
This is especially important to keep in mind if you want to utilize both types of plans.
A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year.
For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000.
If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions.
The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.
Plan in Advance
401(k) Plan FAQs
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.