Thanks to the SECURE Act 2.0, employers now have an easier and less expensive way to address common errors that can occur during retirement plan administration.
The law expands the IRS Employee Plans Compliance Resolution System (EPCRS) and its Self-Correction Program (SCP) to allow employers that sponsor retirement plans to correct mistakes that occur during the day-to-day operation of a plan at any time without involvement from the IRS.
To take advantage of this provision, however, plan sponsors must find these mistakes before the IRS does.
"This part of SECURE 2.0 is a nod to how complex it has become to self-correct honest mistakes" that occur as a retirement plan is being administered, said Christopher Dall, managing director of defined contribution retirement solutions with PNC Institutional Asset Management in Philadelphia.
Given that retirement plan administration often requires connections and data feeds to and from multiple vendors and systems in a specific sequence, it's no surprise that errors can and do occur frequently. As a result, this change is welcome news to plan sponsors.
"This is a big deal," said Constance Brewster, a partner with law firm Troutman Pepper Hamilton Sanders in Atlanta. "It is welcome relief that provides plan sponsors with the opportunity [to correct plan mistakes] with little to no penalty."
Before this change, plan sponsors were limited in how and when they could address these errors. "There were fairly onerous requirements before a plan sponsor could self-correct," said Jennifer Tanck, chief compliance officer and chief operating officer with Pensionmark Financial Group, an investment advisory firm based in Santa Barbara, California. "In the past, the hurdles to self-correct have been so high and with limited areas for correction that [many plan sponsors] didn't bother."
Previously, sponsors had to pay fees and get permission from the IRS before fixing mistakes, Tanck said. Because small errors can quickly multiply into large and widespread errors, any delay in addressing the problem could make the situation worse. In some cases, plan sponsors had to obtain legal advice if there were unexpected problems during the self-correcting process, adding to the cost of the fix, Tanck explained.
Work with Vendors to Find Errors Quickly
However, these new, less onerous self-corrections may not be available to plan sponsors if the IRS spots the errors first. Therefore, plan sponsors must be alert to errors in their retirement plans and be ready to fix them, generally within 18 months.
To prepare, plan sponsors should communicate new expectations with payroll and record-keeping vendors and other parties whose data and systems support retirement plan administration. First and foremost is the expectation that these vendors will be constantly looking for potential errors and report any they find to the plan sponsor as soon as possible.
This is particularly important for smaller plan sponsors that are unlikely to have the internal resources to monitor plans closely. Moreover, offloading this level of plan administration is a key reason why plan sponsors hire vendors in the first place. Indeed, most retirement plan vendor contracts include a certain number of consulting hours to handle errors and other issues.
"Ultimately, the plan sponsor makes the correction, but vendors are involved," usually by providing data and other support, Tanck said. Going forward, employers may want to negotiate additional consulting hours and related services into vendor contracts in the event of an error correction. When reviewing vendor relationships or negotiating new contracts, plan sponsors can set expectations for identifying plan errors, including mandatory reviews and regular data sampling.
Focus Attention on Potential Problem Areas
Retirement plans with 100 or more participants are subject to regular audits. However, it still makes sense for plan sponsors to undertake an informal review of these plans to identify any problems. For example, plan loans can be uniquely vulnerable to mistakes, such as incorrectly deeming such a loan to be in default when it is not because of administrative errors.
Identifying weaknesses and potential problem areas is also important following any sort of disruption with the retirement plan or one of its vendors. Plan errors are more likely when there has been a major change, such as the plan sponsor combining retirement plans following a merger or acquisition. Given the ongoing consolidation in the retirement plan provider market, it may be a record-keeper or other vendor who is part of a merger or acquisition.
"There can be unintentional operating issues, especially when you consider that the plan is always in motion during this process," Dall said. "Mistakes occur because it can be difficult to get everything to work together."
Turnover within the plan sponsor or vendor can be another red flag when issues arise with a retirement plan. If a key person working for a vendor or the plan sponsor leaves that organization, their replacement may need time to get up to speed or else risk overlooking key tasks or projects necessary to fix or prevent mistakes.
"As turnover has increased, there could be cases where plan sponsors identify a problem and ask the vendor for a fix, but it is not done in a timely way or at all because of turnover," Dall said.
Recognize the Opportunity to Improve Plans
Finally, the opportunity to self-correct retirement plan mistakes can also help some employers overcome their reluctance to introduce automatic retirement plan features, such as automatic enrollment, default contributions and automatic escalation for employee plan contributions.
"Prior to this, some plan sponsors have been reluctant to add automatic features because the consequences of mistakes were too great," Tanck said. But with these new ways to self-correct, plan sponsors can be "more confident that inadvertent mistakes will be less of a big deal to fix."
Joanne Sammer is a freelance writer based in New Jersey.