Plan Sponsors’ Five Deadly Sins
Despite all the 401(k) media attention and national plan fiduciary discussion, plan sponsors continue to make very common mistakes year over year that are relatively easy to identify, fix and avoid, with the right help. Mistakes can be opportunities to improve existing retirement plans for the better, but they can also be costly.
And it’s costing plan sponsors a bundle. Employee Benefits Security Administration (EBSA) unit restored over $1.4 billion to employee benefit plans, participants and beneficiaries in FY 2023*. A vast majority of the VFCP submissions were from oversights and omissions from unknowing plan sponsors. At the core of the problem is the assumption by many that plan sponsors understand their role as plan fiduciaries when, in fact, many are very uninformed.
As retirement plan advisors, you are in a unique position to offer some non-fiduciary value-added educational services to help ensure an insignificant plan administration error does not grow into something more complicated and expensive. The fact that the same errors occur every year means there’s an opportunity to strengthen your value proposition and differentiate yourself from your competition by helping create risk-avoidance strategies. You can help clients and prospects save time and money by educating them on fiduciary exposure and how it can be reduced.
Fortunately, both the Internal Revenue Service (IRS) and the DOL have established programs that allow self-correction of these types of mistakes. Under the IRS self-correction programs, most errors can be fixed without notifying the agency or paying a fee. Like the IRS, the DOL’s programs are simple and relatively inexpensive.
Get started by focusing on the top five mistakes and make an impact on your clients’ bottom line by helping them identify, fix and avoid these costly errors:
- Failure to update plan documents. By far, the most common mistake plan sponsors make is failing to update their plan documents to reflect recent changes in the law, in a timely manner. The IRS urges plan sponsors to review their plan documents annually and maintain regular contact with their plan provider. They also suggest a “reminder” system to automatically notify plan sponsors when changes must be completed.
- Failure to follow the terms of the 401(k) plan. Another common mistake is failure to base plan operations on the terms of the plan documents. The IRS recommends plan sponsors conduct due diligence annually to ensure the terms of the plan are being followed and communicate with plan participants and plan service providers about changes to the plan on a “timely basis”.
- Incorrect application of the plan’s definition of compensation deferrals and allocations. Since plans may use different definitions of compensation for different purposes, some plan sponsors may get mixed-up when it comes to applying the proper definition when dealing with deferrals and allocations. It can cause real problems because a plan’s compensation definition must satisfy ERISA rules for determining contribution amounts. The IRS urges ensuring proper training for those in charge of determining compensation and annually reviewing compensation definitions.
- Misapplication of employer matching contributions to eligible employees when an employer miscalculates an employee’s compensation. The IRS urges plan sponsors to contact their plan administrator to ensure they have “adequate and sufficient” records about employment and payroll because, in many cases, the problem is caused by failing to properly count hours of service or identify proper plan entry dates, or an incorrect definition of compensation is being used.
- Failure to satisfy nondiscrimination tests. Plan sponsors must annually test 401(k) plans to ensure the amount of contributions made by non-highly compensated employees (NHCE) are proportional to contributions made by owners and managers. The IRS recommends that plan sponsors who fail the tests, either for the Actual Deferred Percentage (ADP) or the Actual Contribution Percentage (ACP), consider automatic enrollment or securing some type of Safe Harbor for the plan.
Sales tip: Choose your retirement plan partner wisely. Ensure your partner provides all the tools and resources you need, at your fingertips, to help guide clients through the intricacies of plan administration. Make sure they provide the right amount of product training and support you need to help deliver and monitor the best retirement plan for each client.
You can offer tremendous value to your 401(k) clients by using your expertise to help identify, fix and avoid the most common plan mistakes, before they become big problems. This will help reduce their fiduciary exposure and limit their personal liability. Plan sponsors should always contact their benefits lawyer for counsel but of all the external parties that work on a plan, you are most capable and best positioned to help monitor and fix these mistakes. By focusing on the top plan mistakes, you can provide real value by helping clients and showing prospects how they can save money, improve their plan and limit their fiduciary exposure by avoiding costly errors.
*Source: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results
The information, analyses and opinions set out herein have been obtained from sources believed to be reliable and are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.