Who Manages My 401(k) and What Are Their Responsibilities?

A 401(k) is a key tool for retirement savings, but many people are unsure who actually manages their account and what responsibilities those managers have. Multiple parties oversee your funds, ensure compliance with regulations, and make investment options available. Understanding these roles can help you make informed decisions about your retirement strategy.

Employer’s Role

The company offering a 401(k) is responsible for setting it up, maintaining compliance with federal regulations, and ensuring employees have access to the benefits. This includes selecting the plan type, such as a traditional or Roth 401(k), and determining contribution structures, including whether to offer an employer match. Many companies match a percentage of employee contributions, typically between 3% and 6% of salary.

Employers must also ensure the plan follows IRS and Department of Labor (DOL) regulations. Annual nondiscrimination testing, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, prevents highly compensated employees from benefiting disproportionately. If a plan fails these tests, corrective actions like refunding excess contributions may be required.

Administrative responsibilities include enrolling new employees, processing payroll deductions, and providing required disclosures. The Employee Retirement Income Security Act (ERISA) mandates that participants receive a Summary Plan Description (SPD), outlining plan rules, investment options, and withdrawal procedures. Employers must also distribute annual fee disclosures to ensure transparency about costs.

Third-Party Administrator’s Responsibilities

A third-party administrator (TPA) manages the operational aspects of a 401(k), ensuring compliance with federal regulations. While they do not handle investments, they oversee administrative tasks such as processing distributions, monitoring contribution limits, and preparing required filings.

One of their primary responsibilities is recordkeeping—tracking employee contributions, employer matches, and vesting schedules. Vesting determines how much of the employer’s contributions an employee keeps when leaving the company. TPAs also ensure contributions do not exceed IRS limits, which in 2024 are $23,000 for employees under 50 and $30,500 for those eligible for catch-up contributions. If excess contributions occur, the TPA facilitates corrections to avoid penalties.

TPAs conduct compliance testing and government reporting, including the Top-Heavy Test, which ensures key employees do not control more than 60% of plan assets. They also prepare IRS Form 5500, a mandatory report detailing plan operations. Failure to file Form 5500 on time can result in penalties of $250 per day, up to $150,000 per year.

Additionally, TPAs assist with plan amendments and participant distributions. If an employer modifies plan provisions, such as eligibility requirements or loan policies, the TPA ensures proper documentation and communication. They also process hardship withdrawals and loans, verifying that requests meet IRS guidelines. Hardship withdrawals must be for specific reasons like medical expenses or home purchases, and loans cannot exceed the lesser of $50,000 or 50% of the participant’s vested balance.

Investment Firm’s Duties

The investment firm managing a 401(k) determines how participant contributions are allocated within the plan. Their primary responsibility is curating and maintaining investment options, offering a mix of asset classes such as equities, fixed income, and target-date funds.

Investment firms conduct due diligence to ensure available options remain competitive and cost-effective. This involves monitoring expense ratios, historical performance, and asset allocations. Funds with consistently poor returns or excessive fees may be replaced. If an actively managed mutual fund underperforms its benchmark for an extended period, the firm might replace it with a lower-cost index fund tracking the same market segment.

Another function is providing investment education and tools to help employees make informed decisions. Many firms offer online portals with retirement calculators, risk assessment questionnaires, and market insights. Some also provide managed account services, where professionals tailor portfolios based on an individual’s age, risk preference, and retirement timeline.

Fiduciary Oversight

Those overseeing a 401(k) plan must follow fiduciary standards under ERISA, ensuring all decisions benefit participants. This includes selecting and monitoring investment options, negotiating service provider fees, and addressing conflicts of interest. Failure to meet these obligations can result in personal liability, with penalties ranging from financial restitution to civil enforcement actions by the DOL.

One key responsibility is monitoring plan fees. Excessive administrative or investment costs can reduce long-term returns, so fiduciaries must regularly benchmark expenses against industry standards. If a plan’s expense ratio significantly exceeds the median cost for similar plans, fiduciaries may need to renegotiate provider contracts or transition to lower-cost alternatives such as collective investment trusts (CITs) or institutional share class funds. Lawsuits over high 401(k) fees have led to multi-million-dollar settlements, reinforcing the importance of diligent oversight.

Participant Control

While employers, TPAs, investment firms, and fiduciaries manage many aspects of a 401(k), individual participants control how their funds are invested. Decisions about asset allocation, contribution levels, and withdrawal strategies significantly impact long-term retirement outcomes.

Participants choose how to distribute their contributions among available investment options, which may include mutual funds, index funds, and target-date funds. Asset allocation depends on risk tolerance, investment horizon, and retirement goals. Younger employees may allocate more to equities for growth, while those nearing retirement might shift toward fixed-income investments. Many plans offer automatic rebalancing to maintain a participant’s intended risk profile over time.

Beyond investment selection, employees must decide how much to contribute. While the IRS sets annual contribution limits, individuals should contribute enough to take full advantage of any employer match, as failing to do so leaves money on the table. Participants must also be mindful of required minimum distributions (RMDs) starting at age 73, as failing to withdraw the necessary amount can result in a 25% penalty on the shortfall. Understanding these factors helps employees maximize their retirement savings while avoiding costly mistakes.