Understanding 401(k) Terms: Sponsor & Third-Party Administrator

401(k) savings account

A 401(k) plan is an excellent benefit for employers to offer employees. It is a tax-deferred, defined-contribution retirement account that gets its name from a section of the IRS Code. Many employers offer matching funds for all or part of their employees’ contributions to a 401(k) plan. If you are opening a 401(k), two key terms to understand are “sponsor” and “third-party administrator.”

What Is A 401(k) Sponsor?

A 401(k) sponsor is the party who sets up the plan for the benefit of the company’s employees. In most cases, the sponsor is the employer. Duties of the sponsor include setting membership parameters for the plan, making investment choices, and in some cases, providing contribution payments. Unions and professional bodies can also be 401(k) plan sponsors. The sponsor has fiduciary duties, meaning it protects the interests of employees who have contributed to the 401(k) plan.

Sponsors implement, establish, determine benefits, amend, and terminate 401(k) plans. They are responsible for paying employees the retirement income to which they are entitled. This could be a predetermined amount based on the employee’s contributions to the 401(k), or it could be based on the performance of investments made within the plan.

Many 401(k) sponsors outsource their fiduciary duties of managing plan assets to third parties. This gives company employees multiple investment options for their 401(k) funds. Sponsors have a duty to ensure investment advisors managing the plan are following Best-Interest Contract Exemption (BICE) rules under the Employee Retirement Income Security Act (ERISA). This includes giving investment advice in the plan participant’s best interests, fairly disclosing fees, compensation, and material conflicts of interest, and charging only reasonable compensation for services.

What Is A Third-Party Administrator In A 401(k) Plan?

A third-party administrator is an organization that oversees the operation of a 401(k) plan. The administrator may outsource specific duties to a service provider, such as a financial advisor who provides consulting and investment advice to employees participating in the plan. The administrator may also hire an auditor to ensure the financial statements of the 401(k) plan are in full compliance with federal law.

401(k) plan administrators are responsible for record-keeping and a list of duties including:

  • Overseeing loans to ensure they meet IRS guidelines and plan requirements
  • Submitting Form 5500 annually to the IRS, as required under ERISA, to provide information on funding, compliance, vested benefits, decreased participants, and the plan’s operations and financial status
  • Issuing Form 1099-R to account holders when a distribution is made
  • Performing annual compliance testing to ensure highly-compensated employees do not benefit excessively as compared to other employees, as required by the IRS
  • Communicating with plan participants to educate them on the features of the 401(k) plan

A 401(k) sponsor has significant duties and responsibilities and must have a thorough understanding of the plan. A sponsor must make timely disclosures to employees and their beneficiaries and select and monitor service providers. If you need assistance with your company’s 401(k), our knowledgeable agent will be happy to help.