New Year’s resolutions typically don’t stick, but plan sponsors should double their efforts, or it could cost them—dearly.
They’re fiduciaries, and responsible for the retirement plan assets of their employees.
Here are the resolutions to make and keep in order to alleviate at least some of the potential liability they face.
Review plan fees
Call it a Catch-22.
While plan sponsors traditionally had a fiduciary responsibility to only pay “reasonable” plan expenses, most plan providers (especially third-party administrators and brokers) were under no obligation to reveal just how much they made through direct or indirect fees.
Plan sponsors, therefore, could be breaching their fiduciary duty without even knowing it.
Thanks to fee disclosure regulations implemented in 2012, that anomaly no longer exists. The problem I find with fee disclosure now is that most plan sponsors take their disclosure forms and either file it away or throw it out.
They can only determine if plan fees are reasonable by shopping the plan or employing a benchmarking service, and it doesn’t necessarily mean fees have to be the cheapest they find (an important point).
Reviewing plan fees is a good habit; like flossing it’s seen as preventative care.
Most importantly, the Department of Labor often asks for the fee disclosures during plan audits, as well as for the process plan sponsors used it the selection of plan providers. So, it’s a good idea and a great New Year’s resolution for plan sponsors to review and benchmark fees.
Review plan providers
It’s not enough for plan sponsors to review the fees charged by plan providers; they also need to review the quality of work from their plan providers.
Too often, mistakes by providers are discovered during a DOL or IRS audit, or when plan providers are changed.
Discovering problems and errors later mean they will cost more. I’ve seen too many plan sponsors learn the hard way that their long-time plan providers didn’t do the competent job. Loyal plan sponsors simply can’t believe their long-time provider could have been so bad.
However, even the greatest plan providers make mistakes, and the not-so-great providers make many mistakes. Without a system of checks and balances, errors will go undetected. Plan providers make the mistake, but it’s the plan sponsor that’s liable (even if the plan provider is serving in an ERISA §3(16) or ERISA §3(38) capacity). Another important resolution—review their plan providers.
Review salary deferral deposits
One of the most frequent yet avoidable 401k mistakes is the late deposit of participant salary deferrals.
The reason why it’s so common is that too many plan sponsors are unaware of the DOL’s specific goal timely deposits.
Traditionally, plan sponsors could rely on a long safe harbor by depositing salary deferrals by the 15th day of the following month. Several years ago, the DOL said that the real deadline for depositing salary deferrals is actually as quickly as possible.
Depending on the employer, that “quickly as possible” could be as little as three days. If a plan sponsor can reasonably segregate salary deferrals within three days and does so on a regular basis, then one week or several weeks is considered late.
That’s why as part of any New Year’s resolution, the plan sponsor should review the payroll cycle and the speed in which salary deferrals deposits are made. Those that review their deferral deposit cycles and procedures can go a long way in eliminating a possible frequent 401k plan error.
Review compensation
Another frequent error is with compensation, and how it relates to the plan’s terms and administration.
Too often, a plan will not recognize a form of compensation (such as a bonus or paid time off) for purposes of making employer contributions, even though the plan document says they should.
Not operating a plan in accordance with terms (the plan document) is a major compliance error for a 401k plan sponsor, and they may owe a late employer contribution as a result.
It’s important for the plan sponsor to review the compensation they pay to participants, as well as what they recognize as contributions for administration purposes versus what’s stated in the plan document. They then need to ensure consistency between the two.
Review the employee census
Plan sponsors need to review their census of employees to make sure those that need to be participants per the eligibility requirement are actually participants.
Allowing plan participant in too early or too late is a problem, especially if they’re using an eligibility period in the day-to-day plan administration that’s inconsistent with the terms of the plan document.
Bringing in employees too early as participants may require the removal of deferrals from the plan; bringing them in too late will require the plan sponsor to make a corrective contribution for the late deferral opportunity.
Regardless, these are plan errors that a good review of the plan employee census could easily find.
Review active plan participation
Plan sponsors think employees that are plan participants are those that actively defer. Actually, an employee who meets the eligibility requirements and entry date is considered a participant, even if they never defer.
Whether participants actively participant and defer in the 401k plan is an important metric, because it will show whether the employee benefit is utilized.
Plan sponsors offer 401k plans (in part) as a mechanism to recruit and retain employees. A 401k plan with a low deferral rate may be a sign the plan isn’t much of a benefit.
A low deferral rate may also be a problem for compliance tests and may require a corrective employer contribution or refund of salary deferrals to highly compensated employees.
Reviewing the deferral rate may also get the plan sponsor to consider features such as automatic enrollment or a safe harbor contribution.
For any plan sponsor New Year’s resolution, reviewing active plan participation is a must.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a fun and informative retirement plan conference taking place at Dodger Stadium in Los Angeles on Friday, February 22, 2019, from 9:00 am to 2:00 pm. Special guest: Steve Garvey.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.