Retirement Plan Sponsors Have Ultimate Responsibility for Operational Compliance

Retirement Plan Sponsors Have Ultimate Responsibility for Operational Compliance

October 04, 2021

Retirement plan sponsors have incredibly important responsibilities to their plan participants—and even sponsors who rely on third-party administrators (TPAs) to administer their plans maintain this fiduciary duty. What should plan sponsors know about their operational compliance duties and responsibilities?

Making Your TPA a Fiduciary

With ever-shifting federal regulations, keeping up with your responsibilities as a plan provider may be a full-time job in itself. And the penalties for violating Employee Retirement Income Security Act (ERISA) regulations may be severe. Because most ERISA-covered retirement plans must have a legal plan administrator, many plan sponsors select and appoint a TPA to take on these responsibilities.

However, if a plan administrator breaks ERISA regulations by following a TPA's advice, they may still be legally responsible for any penalties or damages to the plan members. It's important for plan sponsors to regularly review their service agreements and update them where necessary to ensure that the TPA has fiduciary responsibilities.

Making your TPA a fiduciary may vest the TPA with the responsibility of making sure all decisions and recommendations are made with the plan participants' financial interests in mind.

Reviewing Your Indemnification Provision

TPA agreements often have an indemnification provision that states the TPA is responsible for any damages incurred as a result of its gross negligence. But by having an indemnification provision that covers ordinary negligence, not just gross negligence, you may be able to recover damages against your TPA if you incur any ERISA or other civil penalties after relying on your TPA's erroneous advice.

Hiring a 3(16) Plan Administrator

Plan sponsors may also consider hiring a 3(16) administrator, which is a plan administrator that manages the day-to-day plan operations as a fiduciary. The scope of a 3(16) administrator's duties varies widely, depending on your needs and the size of your plan.

Joining a Pooled Employer Plan

A final option for plan sponsors looking to limit their liability for errors or mistakes is to join a pooled employer plan (PEP).1 These plans are relatively new and allow employers, both large and small, to pool their retirement plans into one central 401(k). This may reduce the expenses and regulatory hurdles associated with plan administration, though it's still important to make sure the plan administrator is a fiduciary.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.