Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate. An employer is responsible for establishing a 401(k) and for overseeing it as the sponsor and fiduciary.

A self-employed individual can also establish an Individual 401(k), which has the same contribution limits and requires none of the testing or auditing of a regular plan. Other options for work-site retirement plans are SIMPLE IRAs, SEP IRAs, and various kinds of profit-sharing and deferred compensation arrangements.

401(k)s are popular for their flexibility, high contribution limits, relatively low employer contribution requirements as compared to other types of plans. Employers have the option to not contribute at all, but they need to make sure that the plan still gets enough participation from their average employees to satisfy the ADP and top-heavy testing.

If only the highly compensated employees (HCEs) are contributing, the plan will not be allowed to continue, and contributions may be returned. Employers serve as the sponsor and work with a custodian, bookkeeper, and administrator, to maintain the plan on behalf of the employees.

The administrative roles of the plans are divided in this way to prevent conflicts of interest and to ensure that the plan works in the best interest of the employees. This is what it means for the employer to serve in a fiduciary capacity.

This is not to be confused with the Fiduciary Standard of advisors with a Series 65 or 66 license, which has become a hot topic in 2016 with new Department of Labor regulations.