Why Is an ERISA Plan Administrator Important?
While working through the complexities of managing your business’s retirement and health benefits, you’ve likely come across the term ERISA. ERISA, or the Employee Retirement Income Security Act of 1974, sets standards that impact many voluntarily established retirement and health plans to protect the individuals covered by them.
A key element in making sure you’re ERISA compliant is making sure you have the right plan administrator – a figure that’s unfortunately all too often overlooked. In this article, you’ll learn more about ERISA retirement plans, and how an ERISA plan administrator keeps your company on the right side of the law, your employees well-informed, and your retirement plans running smoothly.
Table of Contents
- What Is an ERISA Retirement Plan?
- What Is an ERISA Plan Administrator?
- ERISA Plan Administrator Duties
- ERISA Retirement Plan FAQs
What Is an ERISA Retirement Plan?
An ERISA retirement plan is one sponsored by an employer and covered by the Employee Retirement Income Security Act of 1974, commonly known as ERISA. ERISA was signed into law to protect the retirements of American workers. The law created rules around qualifying retirement to make sure employees were provided with certain rights and protections.
ERISA encompasses two retirement plan categories: defined benefit plans and defined contribution plans. The former provides a specified monthly income after retirement. The benefit is usually based on one’s salary or years of service. Defined contribution plans, on the other hand, include plans like 401(k)s and 403(b)s that don’t offer a specified payment at retirement. Instead, participants contribute to an individual account usually at a specified rate. What they ultimately gain depends on the performance of their account’s investments.
ERISA mandates sharing pertinent details about plan investments and information with participants. This legislation also stipulates baseline requirements for involvement, benefit accumulation, and ownership rights, while holding plan fiduciaries accountable. Additionally, ERISA also grants participants the authority to sue for benefits and violations of fiduciary duties.
Please Note: Not all employer-sponsored retirement plans are covered by ERISA. For example, plans created or maintained by governmental bodies or churches are generally exempt from ERISA.
What Is an ERISA Plan Administrator?
An ERISA retirement plan administrator is a person (or entity) responsible for the management of an employee retirement covered by the Employee Retirement Income Security Act of 1974. The ERISA plan administrator plays a vital role in ensuring that the plan complies with ERISA’s regulations. In this role, the administrator serves as the key link between the retirement plan, its participants, and regulatory authorities.
Additionally, the plan administrator oversees the performance of the retirement plan and makes sure it’s managed soundly. Whether it’s an individual within your company or a third-party service provider, your ERISA plan administrator is pivotal for the smooth and lawful functioning of your retirement plan.
ERISA Plan Administrator Duties
ERISA plan administrators have their hands in a variety of operational and administrative responsibilities to keep retirement plans compliant with ERISA rules. Their duties typically encompass:
Plan Management: Administrators oversee the day-to-day operations of your retirement plan. They ensure it operates according to its policy documents and within the bounds of ERISA’s laws. This function can include overseeing investment options, tracking participant contributions, managing distributions, and more.
Record Keeping and Reporting: Administrators are responsible for maintaining accurate records of the plan’s operations and financials. They must also regularly provide reports to plan participants and the appropriate governmental entities. This includes annual filings with the Department of Labor (typically through Form 5500), participant account statements, and distributing the Summary Plan Description (SPD) which details the plan’s terms and operations.
Fiduciary Duties: ERISA plan administrators have a fiduciary duty to act in the best interests of the retirement plan’s participants. They must see to it that the plan’s assets are managed prudently and solely for the benefit of participants.
Participant Communication: Administrators must provide appropriate and timely communication to participants. This will include information regarding benefits, plan rules, and any plan changes. Administrators usually serve as the primary point of contact for participants with questions or concerns regarding the plan.
Compliance Monitoring: Administrators must stay up-to-date with changes in laws and regulations related to ERISA or retirement plans to ensure the plan remains legally compliant.
ERISA Retirement Plan FAQs
Below, you’ll get answers to some of the most commonly asked questions about how ERISA can impact your retirement plan. You’ll learn more about your plan’s sponsor and administrator roles as well as its beneficiary requirements. Additionally, you’ll see if and how ERISA comes into play with more unique retirement accounts like the 403(b) plan and the solo 401(k).
ERISA Plan Sponsor vs Plan Administrator: What’s the Difference?
The terms “plan administrator” and “plan sponsor” each refer to specific roles within the management of a retirement plan that falls under ERISA. That said, they each have distinct responsibilities.
Plan Sponsor: A plan sponsor is usually the employer or an employee organization, such as a board of trustees or union, that is responsible for creating the plan, deciding on its design and benefit structure, choosing service providers, and funding the plan. The plan sponsor also has a fiduciary responsibility to the plan participants to ensure the plan is working in their best interest.
Plan Administrator: The plan administrator is the person or entity responsible for managing the daily functions and administration of the plan. These responsibilities can include processing benefit claims, keeping accurate records, providing plan documents and disclosures to plan participants, and filing necessary forms with the appropriate governmental entities. Similar to the plan sponsor, the plan administrator also has fiduciary responsibilities to the plan participants.
It’s often the case that in smaller companies, the plan sponsor and administrator are the same entity, usually the employer. That said, in larger companies, or those with more complex plan structures, the roles may be filled by separate entities. For example, a business may rely on a third-party administrator (TPA) to oversee administrative functions associated with the plan.
In summary, both the plan administrator and sponsor are critical in ensuring a retirement plan is compliant with ERISA. The plan sponsor is usually responsible for establishing and funding the plan. The plan administrator, on the other hand, is responsible for overseeing the plan’s operations and administration.
What Are the ERISA Retirement Plan Beneficiary Requirements?
Under ERISA, your retirement plan must follow specific guidelines in regard to the designation of beneficiaries. Below, is a list of key criteria:
Spousal Rights: If you’re married, ERISA requires your spouse to be your primary beneficiary, unless they formally waive this right. If you wish to name someone else as your primary beneficiary (ex: your child), your spouse must consent in writing. Often, this consent will need to be witnessed by a plan representative or a notary public.
Qualified Domestic Relations Orders (QDROs): If you’re divorced, your ex-spouse may still have rights to the assets of your retirement plan. If a QDRO is issued as part of a divorce agreement, it can require a retirement plan to pay all or part of the benefits to an ex-spouse.
Death Benefits: ERISA requires that death benefits be paid if a plan participant dies. If the participant was married, the spouse is usually the beneficiary, unless they’ve consented to another beneficiary. If the participant wasn’t married, the benefits are typically paid to the designated beneficiary on file with the plan. If there is no designated beneficiary, the recipient of the death benefits will be dictated by the terms set out in the plan document.
Beneficiary Designation Forms: ERISA plans require participants to designate their beneficiaries on a form provided by the plan. Any changes to the beneficiaries must also be made on the appropriate form and returned to the plan administrator.
Required Minimum Distributions (RMDs): RMD rules also apply to beneficiaries. The rules differ depending on if the beneficiary is a spouse, a non-spouse (e.g. child, grandchild, or friend), or an entity (like a trust or charity). It will also depend on if the participant died before or after the required beginning date for RMDs.
Is a Solo 401K an ERISA Plan?
No, a solo 401(k) is not subject to the rules of ERISA. These retirement plans are designed for businesses with no employees, and can only cover the business owner and their spouse. As a result, ERISA does not apply because the account is not an employer pension plan and none of the plan’s participants are non-owner employees.
Please Note: Should you have a solo 401(k) for your business and begin hiring employees, you’ll have to transition to a different type of retirement account. This new account may be subject to ERISA requirements and require due diligence when selecting a plan sponsor and administrator.
Are 403(b) Plans Subject to ERISA?
Whether a 403(b) plan is subject to ERISA (Employee Retirement Income Security Act of 1974) depends on the type of organization sponsoring the plan and the extent of the employer’s involvement.
403(b) plans are retirement plans that can be offered to employees of governmental bodies (ex: public schools) and churches. Generally speaking, the 403(b) plans offered through governmental entities or church organizations are exempt from ERISA. However, 403(b) plans sponsored by other tax-exempt organizations are generally subject to ERISA, unless they meet the conditions for the Department of Labor’s “safe harbor” exemption.
This exemption applies if the employer’s involvement in the plan is limited to certain activities. These activities can include permitting the plan’s annuity contractors or custodial account providers to publicize their products to employees, summarizing or reviewing the terms of these products, and performing certain ministerial functions such as collecting contributions.
How Fisher Investment Strategies Helps With ERISA Retirement Plans
At Fischer Investment Strategies, we understand the indispensable role ERISA plan administrators play in ensuring your business’s retirement plan meets regulatory standards. From maintaining financial records to communicating with plan participants, you need an administrator to make sure your retirement plan is legally compliant and beneficial for your employees.
By working with the right financial advisory firm, you’ll be empowered to take your organization’s retirement plan to the next level. With us at your side, you’ll have a trusted partner in identifying ways to save, improve performance, and garner the support your business retirement plan needs to thrive.
Whether you’re establishing a new ERISA plan or improving an existing one, we’re committed to ensuring its success. Don’t wait to get the right plan in place. You can call us directly at our Westlake office at (805) 418-7686, or our San Clemente office at (949) 433-7768. Feel free to also schedule a complimentary consultation at a time that works best for you.
Ted Fischer is a Fee-Only Certified Financial Planner® & fiduciary, and the founder of Fischer Investment Strategies.
Drawing from more than 25 years of experience in the financial services industry, Ted's expertise includes retirement planning, investment analysis, tax planning, estate planning, and insurance.
Ted has an extensive academic background. He received his Certified Financial Planning (CFP®) designation from UCLA in 2011. He became a Qualified Plan Financial Consultant (QPFC®) and an Accredited Investment Fiduciary (AIF®). Ted has a Bachelor of Science in Marketing, with a minor in Finance, from San Diego State University.