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The 401(k) Rule Book

As we approach opening day of Little League baseball season it got me thinking about the parallels between the Rule Book of Little League Baseball and the Rules of the 401(k) game.  


Both have an objective.  In the case of Little League, the objective is to score more runs than one’s opponent, and have fun in the process.  Similarly, the objective of having a 401(K) plan is to retain and reward employees by providing a robust vehicle for them to save for their retirements.


Additionally, baseball and 401(k) plans have players and coaches.  Baseball has a pitcher, catcher, infielders, outfielders, etc.  Each player has his or her specific responsibilities and requires specific skills to master their position and role on the team.


401(K) plans have players as well.  There is the Plan Sponsor.  The Plan Sponsor is the company that is providing the 401(k) plan.  The Plan Sponsor will provide the overall goals and objectives of the 401(k) plan by determining important parameters like who is eligible for the 401(k), will the company provide a matching contribution, etc.  The Plan Sponsor also has a significant amount of fiduciary liability and fiduciary responsibility when operating the 401(K) plan. I will explain the job of a fiduciary when we talk about the rules of the 401(k) game.


An often unseen player of the 401(k) game is the custodian.  This is the party that holds the investments for the other players of the 401(K) game.  The custodian also executes trades, confirms trades, and reconciles the investment accounts.


The umpire in baseball makes sure the game is played by the rules.  401(k) plans have their own umpire if you will, the Third Party Administrator or TPA. The TPA makes sure the plan is compliant with IRS rules by filing the annual 5500 form, performs year end testing, generates plan documents and processes distributions from the 401(k) plan.


Little League teams usually have a team sponsor that everyone knows.  Who could forget Chico’s Bail Bonds from the Bad News Bears? Well 401(k) plans have a Recordkeeper.  The Recordkeeper is usually the party that the employees know as their 401(k) provider.  This is because the Recordkeeper is the one who distributes statements, operates the plan website, and provides a call center. Companies like Transamerica, Fidelity and Vanguard all have recordkeeping services.


To give instruction and to organize the team, Little League teams have coaches.  The Investment Advisor provides this service to 401(K) plans.  A good investment advisor will assist the other players of the 401(k) game by giving recommendations on plan design, serving as a plan fiduciary to help the Plan Sponsor with their fiduciary duties, conducting educational events for the employees, and serving as a resource for employees when they have questions relating to their retirement goals.


Just like in Little League baseball, there is rulebook to the 401(K) game.  It’s called the Employee Retirement Income Security Act of 1974 or ERISA.  ERISA is enforced by the IRS and the Department of Labor (DOL).  

There are many parts to ERISA. Far more than this column allows, but let’s cover the basics.  


The Plan Sponsor and often some of the other players, like the investment advisor and/or TPA, are fiduciaries to the 401(k) plan.  According to ERISA, if you exercise authority or control over the 401(k), render investment advice for a fee, or have discretionary authority or discretionary responsibility in administering the 401(k) then you are a fiduciary.  What that means is, those fiduciaries must always act in the best interest of the plan participants and could have personal liability if they do not do their duties appropriately.


One of the most important ERISA fiduciary rules is the exclusive purpose rule.  ERISA defines the exclusive purpose rule as  “A Fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries”.


Reasonable costs is another very important rule of the 401(K) game, according to ERISA.  The plan sponsor has to make sure that the costs within the 401(k) plan are reasonable and prudent.  That means the investment options need to have reasonable costs, as well as be of the highest quality.  Additionally, the fees that the other players like the investment advisor, recordkeeper and TPA charge also need to be reasonable in light of the services they provide.  These fees not only need to be reasonable and prudent when the plan is started, but on an ongoing basis.


The good news is that plan sponsors are not alone in the 401(k) game.  In most cases a good investment advisor and TPA can provide services that “coach” the plan sponsors through the 401(k) game rule book.  Many times for the same costs that the plan is already paying.