Tedious tasks are “have to do,” rather than “want to do.”
For me, it’s usually cleaning the bathroom or changing the bedroom sheets.
The problem for a 401k-plan sponsor is that despite how tedious some tasks are, they’re nonetheless unavoidable, as plan sponsors have a fiduciary duty to prudently manage the 401k plan.
Certain tasks are therefore required. Failing to complete them can cause a host of problems (and money).
Here are just a few.
1. Tracking eligibility
Every retirement plan has eligibility requirements that an employee must complete in order to be a plan participant. Some 401k plans have immediate eligibility, some require 1,000 hours within a year of employment.
Regardless of the eligibility, plan sponsors need track eligibility requirements to ensure employees become participants when the plan documents say they can.
It’s important for plan sponsors to also make sure that plan operation is done according to the plan document terms.
In addition, failure to include eligible employees as plan participants may require the employer to make corrective employer contributions (plus earnings), whether for employer contributions or what’s known as a missed deferral opportunity.
Failure to include eligible employees as participants over time may also require the plan sponsor to fork over a corrective contribution for the time these employees couldn’t make deferral contributions.
The problem is that these corrective contributions must be made to all affected employees, whether they were planning to make salary deferral contributions or not.
While a major responsibility of a third-party administrator (TPA) is to track eligibility, many errors occur due to non-reporting by the plan sponsors.
If the 401k plan sponsor tracks eligibility on their side correctly, it eliminates the potential for errors that may cost them money.
2. Timely deposit of salary deferrals
A 401k plan is a profit-sharing plan with a cash or deferred arrangement (CODA).
The hallmark of a CODA plan is the use of the plan by participants to defer taxes on their salary deferral/elective contributions.
One of the consistent tasks of a 401k-plan sponsor is to deposit these salary deferral/ elective contributions into the plan.
The task not only must be done, but it also must be done as soon as possible.
For years, plan providers and 401k plan sponsors relied on regulations that gave plan sponsors a safe harbor if they deposited the deferrals no later than the 15th day of the following month.
A few years back, the Department of Labor (DOL) said that reliance was incorrect, and salary deferral contributions must be made as soon as possible.
The DOL has scaled up their enforcement of timely salary deferral deposits by creating a question on Form 5500 to ask a plan sponsor if there are any late deposits.
They have also instituted a voluntary compliance program that allows plan sponsors to fix late deposits with no penalty.
It means the DOL is cracking down on plan sponsors that make late deposits of salary deferrals. They use that Form 5500 question as fodder when choosing plan sponsors to target.
Depositing salary deferrals into a 401k plan is a tedious task, but deposing deferrals late is one of the most avoidable plan errors, yet it’s also the most frequent.
I understand the DOL’s insistence that deferrals be deposited as soon as possible, to avoid the idea that a plan sponsor can use salary deferral deposits as checkbook “float” to pay other bills.
There is no reason why salary deferrals can’t be made within three business days, especially with online banking.
While plan sponsors with multiple locations have a tougher time than those with a single location, it’s incumbent on the staff to ensure timely deposits.
If they aren’t, then the plan sponsor should identify the late deposits and fix them as early as possible.
3. Keeping copies of all plan documents
While 401k plan sponsors are often told to keep ERISA records for seven years, keeping plan documents and amendments is forever. Every few years, the Internal Revenue Service (IRS) requires plan sponsors to amend or completely restate their plan document.
When the plan is either being audited by the IRS or seeking a favorable determination letter, the plan sponsor is often required to present their older plan documents and amendments (that may no longer be even in effect) to make sure that the plan sponsor complied with the IRS deadlines to amend or restate their plan document.
I have often had to represent plan sponsors before the IRS who probably did amend the plan document as required, but didn’t have a copy of the executed amendment and/or restatement.
The problem with not producing a copy of a fully dated and executed amendment/restatement is that the IRS treats the plan sponsor as if they never completed it.
Every plan document and plan amendment should be stored and saved for the inevitable future use.
4. Handing out notices and summary plan descriptions
ERISA is all about protecting participant rights and there is a requirement to hand out certain annual notices, as well as the summary plan description, when an employee becomes a participant and when there has been a plan document restatement.
It’s important that a plan sponsor complete this task.
5. Review fee disclosures and benchmarking fees
401k plan sponsors get disclosures from their plan providers on the direct and indirect compensation they receive for servicing the 401k plan.
The problem is that plan sponsors need to review the disclosures and benchmark their fees as they have a fiduciary duty to pay reasonable plan expenses.
A 401k-plan sponsor must be diligent with this tedious task by shopping the plan around to competing plan providers or by benchmarking fees through a service or book.
Regardless of the method, a 401k-plan sponsor has to be active in determining whether plan fees are reasonable or not.
6. Substantiating hardships for distributions
Hardship distributions are a popular feature for most 401k plans because they allow the participant to withdraw from their plan for certain reasons, which typically fall under the IRS’ safe harbor guidelines, such as for medical expenses, funeral expenses, and to prevent eviction/foreclosure.
The major problem with hardship distributions is that most plan sponsors don’t review whether participants document that financial need. Whether it’s an eviction notice or a hospital bill, plan sponsors can’t take a participant’s word that they qualify.
The IRS is ramping up the review of hardship requests as part of their audit.
7. Making sure participant loans are being paid
Like hardships, loans are popular.
A headache is that they need to be on a payment schedule, at least quarterly, to avoid a default. For many reasons, such as multiple loans or a participant not working, plan loans may inadvertently fall into default that would cause a distribution to plan participants.
If the loan isn’t treated as a default, the 401k plan is treated as committing a prohibited transaction that doesn’t meet the loan exemption for prohibited transactions.
8. Comply with ERISA §404(c)
Too many plan sponsors think they’re bulletproof from liability for losses sustained by participants who direct their own 401k investments.
They don’t understand that ERISA §404(c) will only protect plan sponsors from this liability if they take part in a process of prudently selecting plan investments and giving plan participants enough information to make informed investment decisions.
That means plan sponsors must review plan investment options with their advisor and they must provide at least investment education to participants on a regular basis. This liability protection isn’t all or nothing, and depends on how much of the process plan sponsors fulfill.
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.