For better or for worse, the 401(k) plan has moved to center stage in the context of American retirement policy. Fittingly, Part 2 of this Employee Retirement Income Securities Act of 1974 (“ERISA”) driven series focuses on a handful of common misses that occur with 401(k) plans.
Not Knowing the Terms of the Plan Document - Definition of Compensation
Last week, we touched on the importance of a plan operating in accordance with its terms. Failure to operate in accordance with the terms of a plan results in a plan sponsor having to engage in the plan correction process. A reasonably common error in 401(k) plans is misapplication of the definition of compensation. One example of this sort of failure is as follows: a plan may define compensation by including bonuses; the plan sponsor subsequently calculates pre-tax deferrals based on a definition of compensation that excludes the bonus payments. The result is that deferrals (and possibly matches) are not put into the plan which would otherwise be owed pursuant to the terms of the plan. Plan sponsors can help reduce this error by reviewing their plan document’s definition of compensation and periodically reviewing contributions made to the plan with the third-party administrator.
Failure to Attend and Document Regular Investment Committee Meetings
Employers, and other parties identified by the employer, will act as fiduciaries to the plan. The fulfillment of this fiduciary duty to the plan participants and beneficiaries should be organized and documented. Consequently, plan sponsors often appoint committees to be in charge of plan investment oversight. These committees meet to review plan investments and service provider services. Although there are differences depending upon the needs of the specific plan, generally a designated committee serving in a fiduciary role to the plan will meet at least quarterly and document meeting minutes. Even in the case that only one individual takes on the role of plan oversight, third-party service providers may be available to attend periodic meetings concerning benchmarking of plan investments. Although there may be meetings which result in very few action items, the process and the documentation of the process is important to demonstrating compliance with ERISA’s fiduciary obligations and failure to maintain proper oversight of a 401(k) plan may result in personal liability under ERISA.
ERISA imposes various notice requirements on plan sponsors which are required to be distributed on different schedules and events to a number of parties, including plan participants, beneficiaries, and governmental authorities. Notice and disclosure requirements include (but are not limited to) providing the following: summary plan descriptions, summaries of material modifications, summary annual reports, safe harbor notices, qualified default investment alternative notices, and annual participant fee disclosures, to name a few. Given the number of notices that must be generated, it is easy for a plan sponsor to either miss a disclosure obligation or mistakenly expect a contracted third-party administrator to meet the notice requirements. In order to prevent missing notices, plan sponsors should: review with their retirement plan administrators whether the administrator or plan sponsor is responsible for certain notices; and maintain a checklist of the required notices.
The above is not intended to serve as a complete list of every common error that exists for a 401(k) plan, but rather a bite-sized reminder for plan sponsors.