Few would disagree about the benefit of receiving annual checkups to promote good health, or about the value of performing regularly scheduled maintenance on cars to maximize their performance. But what about employer-provided retirement plans?
Don't underestimate the importance of reviewing 401(k) and similar plans on an annual basis to check for common operational failures. Plan sponsors need to assure employees that they are monitoring retirement plan operations closely to maximize and protect these benefits. Moreover, fiduciary duties are a significant responsibility that is monitored closely by government agencies and under constant scrutiny. Following the terms of a plan document is one of the most important roles of a fiduciary.
The Review Process
The review process should include the assessment of several operational aspects of a retirement plan such as eligibility, employee and employer contributions, eligible compensation for respective contributions, and distributions and vesting.
Plan sponsors have the option of using an independent third party to perform the review and performing the review internally. Rotating between internal and external reviews of a retirement plan can help prevent the review process from getting stale.
Several tools and resources are available to assist in the completion of this review. The Internal Revenue Service (IRS) has developed checklists based on plan type to allow plan sponsors to perform a quick review for operational compliance. These checklists do not cover all plan requirements, but they provide an easy way to begin a retirement plan checkup.
The checklists include questions regarding whether the plan document has been updated within the past few years, whether the plan has identified all eligible employees and whether participants are receiving their contributions as specified in the plan. Other checklist questions include whether the plan deposited contributions in the respective employees’ accounts on a timely basis and if the plan’s elective deferrals are limited to amounts allowable under the Internal Revenue Code for the calendar year.
The answers to these questions might indicate that a plan is operating in accordance with the plan document provisions and current regulations or that a plan has an operational issue that needs attention and action.
Whatever the outcome that the review produces, plan operational failures should be addressed immediately.
Common mistakes that the IRS finds in its retirement plan examinations include:
• Not covering the proper employees.
• Not giving employees required information.
• Not depositing employee deferrals on time.
• Not depositing employer contributions on time.
• Not following the terms of the plan document.
• Not limiting employee deferrals and employer contributions to the limits.
Correcting Plan Errors
If plan operational issues have been identified, don’t panic—mistakes happen. The IRS and U.S. Department of Labor (DOL) have established programs to assist in correcting these situations. The programs are designed to encourage plan sponsors to take corrective action as soon as possible. Programs under the Employee Plans Compliance Resolution System (EPCRS) include the Voluntary Correction Program and the Self-Correction Program.
Plan sponsors that inadvertently missed the requirement to file an annual Form 5500 for a sponsored retirement plan can self-correct the error voluntarily by entering the Delinquent Filer Voluntary Compliance Program (DFVCP). Under this program, eligible plan sponsors pay reduced civil penalties for the late filings if the required filing under the DFVCP is made prior to the receipt of notification of the late filing by the DOL.
This program has easy-to-follow instructions and reporting requirements and includes an online calculator to assist plan sponsors in determining the penalty owed because of the late filing.
Not all errors require the payment of penalties to the IRS and DOL. Several operational errors can be fixed without difficulty, without notification to the IRS and without penalty. A fundamental principle to consider when self-correcting is that plan participants should be restored to the position they would have been in if there had been no operational defect.
The IRS has published Fix-It Guides that include advice on how to identify and correct common mistakes for all types of retirement plans and to avoid repeating them. The guides include an EPCRS overview and the most common errors as identified by IRS plan audits along with guidance on how to correct these errors.
Third-party administrators and advisors can provide insight and assistance during the correction of plan operational errors. Plan sponsors should explore all avenues to ensure that they take the most appropriate corrective measure to address the issue.
Once plan sponsors have identified and corrected plan errors, it is crucial for them to establish procedures to avoid repeat errors. This might include enhancing communications to all involved parties, revising procedures and protocol within the company, enhancing internal controls surrounding plan administration and working closely with third-party administrators to monitor activity more closely.
Whatever the circumstance, plan sponsors need to ensure that they have identified the breakdown to make certain that the error can be detected or avoided in the future.
Regular Plan Maintenance
In addition to conducting an annual plan review, plan sponsors should perform regular maintenance to ensure seamless plan operations. This includes staying current on regulations, watching out for common mistakes and reporting to the federal government as required. Plan sponsors are responsible for establishing a program of internal controls, including monitoring and oversight controls surrounding the retirement plan.
A retirement plan committee can help the monitoring and oversight function. However, the committee won't be effective unless it conducts regular meetings. These oversight meetings should not only review investment results but also check that internal controls related to plan administration are effective and operating appropriately to assist in identifying and detecting operational failures. The retirement plan committee should be well versed in all aspects of the plan, including review of investment performance, keeping current on law changes and monitoring of third-party administrators.
Jeanne Barrett, a senior audit manager with Schneider Downs & Co., Inc, is a member of the firm’s employee benefits reporting group, which is responsible for developing specialized knowledge for ERISA engagements. She is a member of the American and Pennsylvania Institutes of Certified Public Accountants.
© 2012 Schneider Downs & Co.
Related SHRM Articles:
Fiduciary Obligations: The Devil's in the Details, SHRM Online Benefits Discipline, June 2011
Common Investment Committee Mistakes and Solutions, SHRM Online Benefits Discipline, January 2011
Pointers for Designing an 'Ideal' 401(k) Plan, SHRM Online Benefits Discipline, November 2010
How to Conduct a Retirement Plan Assessment, SHRM Online Benefits Discipline, January 2008
Developing a 401(k) Investment Policy Statement, SHRM Online Benefits Discipline, January 2008
Take a Closer Look: Specialized 401(k) Plan Audits, HR Magazine, June 2005
Related SHRM Video:
Reviewing Retirement Plans
Focus on HR, SHRM's video news program, looked at how employers can determine whether their retirement plans meet their employees' needs.
Related External Resources:
Best Practices for Investment Committee Members, Brightscape Investment Centers, August 2012
The Best Practices of Retirement Plan Committees, RidgeWorth Investments, August 2012
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page