Saving in a 401(k) is an opportunity to build wealth on a tax-advantaged basis. Most people, however, may not be aware that there are multiple players working behind the scenes to keep a 401(k) plan running smoothly.

Some of these players are required to follow a fiduciary duty; others are not. A 401(k) custodian generally falls into the second category when determining who is (or isn't) a fiduciary.

What Is a Fiduciary?

To understand whether a 401(k) custodian is a fiduciary, it helps to start with a definition of the term. According to the Internal Revenue Service (IRS), a fiduciary is "a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity."

The basic responsibilities of a retirement plan fiduciary include:

• Acting solely in the interest of the plan participants and their beneficiaries
• Acting for the exclusive purpose of providing benefits to plan participants and their beneficiaries and defraying reasonable expenses of the plan
• Carrying out duties with the care, skill, prudence, and diligence of a person familiar with the plan
• Following the plan documents
• Diversifying plan investments

The Employee Retirement Income Security Act (ERISA) protects 401(k) plan assets by requiring that certain persons or entities carry out fiduciary responsibilities. Those individuals or entities include anyone who:

• Exercises discretionary control or authority over plan management or plan assets
• Has discretionary authority or responsibility for plan administration
• Provides investment advice to the plan in exchange for compensation

Under ERISA rules, fiduciaries who don't follow the established principles of conduct may be liable for losses to the plan or the restoration of profits generated through improper use of plan assets. ERISA also protects investors who believe they've suffered financial losses as the result of a breach of fiduciary duty.

Role of the 401(k) Custodian

When a 401(k) plan is established, the money that plan participants contribute must be held securely. It's the job of the custodian to safeguard the assets of the plan and the workers participating in it. The duties of the custodian typically include:

• Allocating earnings and losses to plan participant accounts accordingly
• Certifying balances of plan assets
• Investing contributions to the plan as directed

A 401(k) custodian may also assume record-keeping duties, though these may be handled separately. The record-keeper's job is to create a paper trail of transactions, including balances, contributions, and the purchase or sale of assets. The custodian of a 401(k) reports to the plan's trustee, who is able to control plan assets.

Is a 401(k) Custodian a Fiduciary?

A 401(k) custodian's main function is holding plan assets, not managing them. The trustee—not the custodian—has fiduciary duties and responsibilities toward the plan sponsor and the plan participants. A custodian can only buy, sell, or move assets under the express direction of the trustee.

This type of arrangement allows for better risk management because it creates a system of checks and balances. The custodian must coordinate with the trustee, who's responsible for coordinating with other parties in a 401(k) arrangement, including the plan sponsor, investment advisors, record-keepers, and any third-party administrators (TPAs) that the plan hires.

In terms of plan hierarchy, the custodian is usually near the bottom of the pile, with fiduciaries assuming the most important rules. That doesn't mean, however, that the custodian's job doesn't matter. A 401(k) custodian must still take proper steps to ensure that they securely hold plan assets and uphold any directions trustees give regarding them.

The Bottom Line

A 401(k) custodian has an important function in the administration and management of a retirement plan by holding plan assets. Though the custodian is not a fiduciary, they are answerable to one in the form of the trustee. Understanding the different working parts of your 401(k) plan—and who does what—can come in handy if you have questions about your plan, want to execute a rollover, or are ready to start taking withdrawals from your retirement savings.