The terms associated with employer sponsored retirement plans can be confusing, causing fuzzy understandings to be passed around in the course of overseeing the plan. Be careful, though: the Employee Benefits Security Administration (EBSA) reminds us that failure to understand and adhere to the plan document is a frequent and costly plan sponsor error.
Dig Into The Actual Plan Document
Misinterpreting or failing to adhere to the provisions in the plan document is a common oversight made by plan sponsors. Since informal, “we do it this way” protocols tend to get replicated, oversights related to plan management can easily become ingrained into the business culture, leading to fiduciary breaches that are repeated over years, as Scott D. Michael, of Savant points out:
Possibly the most frequent source of fiduciary breach, interpretation of plan provisions is not always intuitive. The remittance of participant deferrals “as soon as administratively possible” means as soon as possible, not as soon as convenient. A common response when a plan administrator is asked how they determined applicability of a specific plan provision (e.g., eligibility for employer match) is, “The prior administrator told me how to do it.” This response does not instill confidence that it is being handled correctly. Many administrative errors go on for years, and every year not corrected is another fiduciary breach. The management of plan forfeitures (non-vested assets left in plan by a terminated participant) can be especially troublesome. The rule is to allocate these assets annually at year end. This can be a costly and administratively cumbersome correction, but all too often it’s not accomplished annually which violates the rule forbidding plan unallocated assets.
To prevent problems, EBSA reminds plan sponsors to refer to the plan document for clarity on who is responsible for the various activities required by the plan, including: custody of plan assets, recordkeeping, benefit decisions and directing investments. When delegating responsibilities, whether within the company or to service providers, plan sponsors must:
- Make sure they understand their responsibilities
- Make sure they have the knowledge and information needed to fulfill their responsibilities
- Monitor to make sure they carry out their assignments
According to the Employee Benefits Security Administration’s “Getting It Right” resource for plan sponsors, one of the most common errors associated with plan sponsorship is failure to deposit participant contributions to the plan “as soon as they reasonably can be segregated from the company’s general assets.” As a plan sponsor, avoid this mistake by knowing how your payroll system and service providers “ensure that participant contributions are forwarded to the plan on the earliest possible date in compliance with the law.”
Plan Eligibility
Employee eligibility for participation in the company sponsored plan is another area of the plan document that requires close attention: be sure the eligibility requirements as stated in the document are uniformly applied to all employees. At Plan Sponsor, Ed McCarthy explains the most common approaches to plan eligibility:
Generally, a plan may require an employee to 1) be at least 21 years old and 2) have a year of service, typically defined as working at least 1,000 hours in a 12-month period, before the employee can participate in a plan. However, plans can allow employees to begin participation before reaching age 21 or before completing one year of service. Employers frequently provide more generous enrollment requirements to enhance employee recruitment, says Marc Fowler, director of retirement education with retirement plan provider Human Interest in San Francisco: “Often what we see is that they put immediate eligibility in place because that is very attractive in terms of being able to bring new talent into the organization.”
In addition to ensuring that the plan eligibility protocols described in the plan document are implemented, plan sponsors should make sure they fully understand all plan features and terms, which may include matching contributions, vesting, true-ups, and safe harbors. For assistance, Plan Sponsor provides a helpful breakdown of the key terms underpinning the structure of 401(k) retirement accounts.
Diligence Plus Protection?
While acting as diligently and prudently as possible on behalf of the plan and participants, plan sponsors need to remember that as fiduciaries, they can be held personally liable in the event errors and oversights result in investigations and litigation. Moreover, although ERISA bonds are required by the DOL for the protection of the plan, they do not protect plan sponsors in the event allegations are made.
Colonial Surety offers a convenient and affordable protection package to help plan sponsors mitigate their risks. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services.
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