You’ve hired a financial institution or third party administrator (TPA) for your 401(k) plan. The service provider handles “everything,” so there is nothing to worry about – right? Probably not because no TPA or other service provider does “everything” (take a look at your service agreement). It’s the plan sponsor who typically retains responsibility for overall plan operations as the “plan administrator.” So practically every 401(k) plan sponsor needs to deal with each of the following – sometimes without much help from the plan’s current providers:
1. Fee Disclosures
Responsible plan fiduciaries need to evaluate service provider fees, the nature and quality of covered services, and compliance of provider fee disclosures with the applicable regulations. Third party administrators may not assist by providing “benchmarking” data on competitive fees or guidance on the requirements of the fee disclosure regulations for service providers.
Why this matters: If the responsible plan fiduciary accepts a deficient service provider fee disclosure, the service provider’s agreement with the plan becomes a prohibited transaction with an associated excise tax and a requirement that the arrangement with the service provider be corrected. There also is a potential liability to plan participants who may be adversely affected by any excessive provider fees.
2. Investment Decisions
Plans need to make investment decisions, including the designation of an array of investment funds for 401(k) participant selection and the designation of a default investment for participants who do not make their own investment decisions. Who makes that decision for your plan? Investment consultants and wealth managers who work for financial institutions do not necessarily serve the best interests of your plan. They may even have personal incentives to have your plan select more expensive investment funds.
Why this matters: Only an investment advisor or investment manager acting in a fiduciary capacity has a legal duty to act in the best interests of your plan and its participants. Unless your company is in the financial services industry or is otherwise qualified to make investment decisions for its 401(k) plan, the plan needs investment advice from an independent fiduciary who has no financial stake in your plan’s specific investment selections. Selecting expensive or poor performing investment funds for your 401(k) plan is a basic mistake that can be avoided by having an investment professional work for your plan, not a financial institution.
3. Payroll Deductions
Participant 401(k) contributions made by payroll deductions need to be forwarded by the employer to the plan within certain time limits (as soon as reasonably possible for plans with 100 or more participants and within seven business days for smaller plans). DOL guidance suggests that a designated individual or “special trustee” should be assigned the specific responsibility for forwarding 401(k) contributions on a timely basis. Pre-approved 401(k) plan documents are now providing for the designation of such a special trustee, who typically would be an employee with control over the sponsor’s cash management.
Why this matters: Late 401(k) contributions are a focus of DOL audits and frequently result in DOL recoveries. Late 401(k) contributions are subject to both a prohibited transaction excise tax and a civil penalty under Section 502(l) of ERISA.
4. Plan Audits
Plans subject to required annual audits by an independent CPA (generally plans with more than 100 participants) should pay attention to the audit results and resolve any compliance issues raised by the CPA. More important, make sure your CPA is experienced in auditing retirement plans and spends enough time with the responsible staff employees to understand how your plan operates.
Why this matters: The Department of Labor (DOL) is likely to reject a deficient plan audit. Because the audit is included as part of the plan’s annual report on Form 5500, a deficient plan audit will, in turn, cause the annual report to be rejected. This can result in a late filing and penalties of up to $110 per day. Of course, the deficient plan audit will also have to be corrected – most likely at the employer’s expense.
5. Participant Releases
When 401(k) benefits are paid to a participant, the participant can be requested to sign a valid release of certain claims against the plan and its fiduciaries. Plan administrators should include a participant release along with their benefit distribution forms.
Why this matters: Recent Supreme Court and related federal court decisions have expanded the remedies available to participants who are adversely impacted by the conduct of plan fiduciaries. Many of these claims can be released and waived by participants when they are paid their benefits. There’s no reason not to require such a release as part of the benefit distribution package and mention it in the summary plan description. And employers can make the decision to include such a release even if plan service providers do not suggest it.
Recommendations: Plan service providers can help in their designated operational field. For example, some TPAs help benchmark provider fees so plan fiduciaries have guidelines on “reasonable” fees. Investment advisors can help with the documentation of investment decisions by plan fiduciaries. So make sure you are getting proper attention from qualified service providers. But it also is important to understand those plan responsibilities that are not delegated to service providers. If your current service providers cannot fully assist with provider fee disclosures or other operating matters, get needed assistance from other providers, investment advisors or legal counsel. Also bear in mind that communications with an employer’s regular corporate or benefits lawyers about 401(k) compliance issues may not be protected by attorney-client confidentiality. Consider addressing significant operational concerns such as fiduciary compliance issues with an independent benefits lawyer to preserve such confidentiality.