Plan Sponsor

What Is a Plan Sponsor?

A plan sponsor is a designated party — usually a company or employer — that sets up a healthcare or retirement plan, such as a 401(k), for the benefit of the organization's employees. The responsibilities of the plan sponsor include determining membership parameters, investment choices, and in some cases, providing contribution payments in the form of cash and/or stock.

How a Plan Sponsor Works

Some companies offer retirement savings plans, pension plans, or health plans to their employees as part of their employee benefits program. These companies are referred to as plan sponsors. Employers are typically plan sponsors, but unions and professional bodies could also be plan sponsors.

The plan sponsor implements and establishes a plan, determines the benefits package, amends the plan, and terminates the plan. Depending on the type of retirement or health plan available to employees, contributions to the plan can be made by both the plan sponsor and employees, plan sponsor alone, or employee alone.

Individuals and organizations that provide investment advice to retirement plan participants and sponsors are subject to the fiduciary standards set by the Employee Retirement Income Security Act (ERISA).

The plan sponsor is responsible for paying the employees the retirement income that they are entitled to from the plan. The retirement income can be based on the performance of investments within the plan, or it could be a pre-determined amount based on how much the employee contributed. An employee who leaves before the vested time may only receive the amount that they contributed to the plan, forfeiting any benefits that the retirement or health plan provides.

While some plan sponsors take matters into their own hands and handle all the investment decisions for retirement plans, most of them outsource the fiduciary management of the assets in the plan to one or more third parties. This way, multiple investment options run by different money managers may be offered to suit various risk profiles among the company's employees.

Special Considerations

Plan sponsors have to ensure that the investment advisors managing the plan investments are adhering by the Best-Interest Contract Exemption (BICE) rules under ERISA, which include giving investment advice that’s in the plan participants’ best interests, charging no more than reasonable compensation, fairly disclosing fees, compensation, and material conflicts of interest associated with their investment recommendations, etc.

In establishments in which the plan sponsor also acts as the plan administrator, the plan sponsor is said to be a fiduciary. A fiduciary is required to diversify investments to minimize the risk of large losses; to act in accordance with the rules governing the plan unless the rules are inconsistent with ERISA; to act solely in the interest of the plan participants and their beneficiaries; and to act with prudence, skill, and diligence of a prudent person acting in a similar capacity.