It’s a very, very rare business owner who sets out to screw up the company retirement plan. Most plan sponsors take fiduciary obligations and secure retirements seriously. Nonetheless, ERISA is a complex law with high standards. Mistakes and oversights happen, and the consequences are serious. Here are common errors and tips for avoiding them.
Make Timely Contributions
According to the Employee Benefits Security Administration’s “Getting It Right” education campaign for plan fiduciaries, 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.” EBSA’s resource booklet, Meeting Your Fiduciary Responsibilities, provides these three key points about participant contributions:
If a plan provides for salary reductions from employees’ paychecks for contribution to the plan (such as in a 401(k) plan), then the employer must deposit the contributions in a timely manner. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so.
For plans with fewer than 100 participants, salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law. For all contributions, employee and employer (if any), the plan must designate a fiduciary, typically the trustee, to make sure that contributions due to the plan are collected. If the plan and other documents are silent or ambiguous, the trustee generally has this responsibility
Read, Understand and Refer To The Actual Plan Document
Failure to actually follow the plan document in the administration of the plan is another frequent mistake plan sponsors make. EBSA stresses knowing 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
Plan sponsors need to be aware that misinterpretation and failure to adhere to the plan document can create habits in company culture and operations, leading to fiduciary breaches that pile up over years. Scott D. Michael, a financial advisor at Savant offers these insights about common fiduciary errors:
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.
Performance Evaluation?
Professionals at Wilmington Trust suggest that one way fiduciaries can proactively review their own performance is to honestly ask themselves these six questions, and adjust their actions accordingly:
- Do you have written plan documents and an investment policy statement, and where are they stored?
- Are you hosting an annual plan review, and with whom?
- When was the last time you reviewed your governance process and decision-making process?
- Do you understand selection and oversight of your investment options?
- Do you regularly monitor and evaluate the providers (including service levels and fees) who support your plan?
- Are you aware of cybersecurity best practices and coverage requirements for you as a sponsor and your vendors?
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, they do not protect plan sponsors in the event allegations are made.
Colonial Surety offers a convenient and affordable package, tailored especially 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.
At Colonial, adding Fiduciary & Cyber Liability Insurance to your ERISA fidelity bond is quick – login to your dashboard, click “upgrade” next to your bond, and get a quote. Our packages are available for 1, 2, and 3-year terms, providing flexibility and locked-in rates:
Liability Insurance for Plan Sponsors HERE
Colonial Surety was founded in 1930 and continues giving customers the assurance that they, their businesses, and their clients are safeguarded with the right surety and insurance products at all times. We are a direct and digital insurer offering products through an online platform supported with exemplary customer service. We give customers a simple, direct, and instant service that takes the pain out of buying insurance and bonds. Colonial Surety is licensed in every state in the U.S., rated “A” Excellent by A.M. Best, and listed by the U.S. Treasury as an approved surety.