401(k) Compliance Check #1: Who Makes the Decisions for Your 401(k) Plan?

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Foley & Lardner LLPFor most employers, January kicks off a brand new 401(k) plan year!  Now that all of the year-end plan amendments, participant notices, and new deferral elections are behind you, this is a great time to take a step back and look at the big picture for your 401(k) plan’s governance and decision-making process (or, ahem, lack thereof) and make sure your 401(k) plan decision-makers are properly authorized to make those decisions. 

Why This Topic is Important

If you read through your formal 401(k) plan document, you’d probably be shocked at the number times the plan requires someone to make a determination, authorization or approval under the plan.  Each one of those instances is a potential ground for a lawsuit or audit inquiry if the person who is authorized under the plan to make that decision is not, in fact, the person who is actually making that decision.  The purpose of this “401(k) Compliance Check” is to ensure that the people who are making the decisions for your 401(k) plan are actually authorized to do so by your plan documents. 

Step One:  Check Your Plan Document

When a client calls and asks us “Who is allowed to [insert whatever decision is needed here] under our 401(k) plan?”, our answer is always “What does your plan document say about that?”  Your 401(k) plan document is always the starting point to determine who is authorized to make plan decisions.  The trick is to make sure that you identify the right place in the plan to find the answer for the particular decision at issue.  For example, if the plan needs to be amended, then there should be an amendment section that describes who has amendment authority. If the decision relates to the amount of the employer’s discretionary contribution, then there is a different section in the plan for determining contributions.  And, when it comes to approving forms for use under the plan (e.g., beneficiary designations or enrollment materials), yet a different section of the plan addresses who has authority over that. 

Step Two:  Check Other Plan-Related Documents

While your 401(k) plan document is always the starting point, the plan is not necessarily the only relevant document.  Most plans allow the decision-maker to delegate its authority to someone else, whether it be an individual, committee or third-party vendor.  Some places to look to see if the plan’s decision-maker has delegated its authority:

  • Minutes of Meetings:  If a committee or board of directors is the decision-maker (e.g, the company’s benefits/retirement plan committee), there might be minutes of a meeting in which the committee or board delegated some its authority to someone else. 
  • Benefits Committee Charter:  Likewise, a committee may have a written charter that delegates some of its authority to one or more individuals (or gives the committee the ability to delegate its authority). 
  • Ancillary Policies:  Your 401(k) plan may have a variety of ancillary policies, such as investment, loan or QDRO policies.  Those policies may specify decision-makers for the particular plan administration aspects described in those policies. 
  • Trustee and Third-Party Service Agreements:  Your trustee and third-party service agreements may specify who can make decisions with respect to the area of plan administration handled by that particular service provider (e.g., record-keeping, investment consulting).

One issue we often encounter is that even if the ancillary document identifies someone else to make decisions, the employer often cannot find records to show that the plan’s authorized decision-maker actually approved that ancillary document or appointed that other decision-maker.  In other words, proper delegation documentation is also necessary to establish decision-making authority in others.  A few common examples where we see this issue come up are:

  • The 401(k) plan requires the board of directors to approve plan amendments.  In practice, a company officer signs the amendment.  However, there is no board resolution delegating that amendment authority.
  • The 401(k) plan names the company as the “plan administrator”, but in practice some or all of the plan’s administration or investment decisions are handled by a benefits or investment committee.  There is no written authorization by the board of directors or a company officer establishing the committee, approving a charter, and appointing their members.
  • The benefits committee delegates certain plan administration tasks, including working directly with third-party service providers on day-to-day administration, to internal company employees, typically in the HR or finance departments.  There are no committee meeting minutes or other formal documentation approving that delegation.

Step Three: Compare the Documents to What is Happening in Practice

Once you’ve surveyed all of your various plan documents to determine who is supposed to be making decisions (and in what circumstances), then identify who is actually making those decisions in practice and look for discrepancies between the two.  As mentioned above, it is quite common for there to be a disconnect, often because you cannot locate the “paper trail” to demonstrate proper delegations of authority—your plan says X makes the decision, while in reality Y is making that decision, and you cannot find anything in writing from X delegating that authority to Y. 

Now What?

If you find yourself in that common situation where you have a disconnect between your documents and what is happening in practice, it’s fixable in one of two ways—change your decision-making practices to match your documents, or change your documents to match your decision-making practices.  Which approach is best for your company will vary based on the circumstances. In our experience, most employers prefer to continue with their current 401(k) plan decision-making process, so we revise the documents accordingly.  We amend the plan, or implement appropriate written delegations, so that the documentation properly reflects who serves as the decision-makers or who has been appointed or authorized by the decision-maker.  Other employers find that their documents actually do a good job of assigning responsibility, and so they change who makes decisions to match their plan documents.  Either way, being diligent in this review process will pay off and give the company certainty that, whatever 401(k) plan decision is at issue, you know the right person is making it. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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