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401k Plan Sponsors White Paper

Posted by tempdavis on February 19, 2016

Integrated Financial Partners - Business Whitepaper Series

401k Thoughts for Plan Sponsors - Steps you can take to help avoid a costly disaster.

In 1974, Congress passed the Employee Retirement Income Security Act or ERISA.  This Act paved the way for corporate Defined Contribution Retirement Savings Plans or what we frequently refer to as a 401k.  401k is literally the paragraph number in the Internal Revenue Service (IRS) Code.   It took a while to catch on and when it did many companies piled on the wagon as employees learned and asked for the plans in the 1980’s.  The Department of Labor (DOL) and the IRS together are responsible for monitoring many elements provided for in ERISA.

After about ten years, corporations began shifting from the old pension which is known as a Defined Benefit Plan (DB) to this new Defined Contribution Plan (DC).  Switching saves the corporation money because the DC is not aged based with lifetime income like the DB.  In addition, most all employees must be funded in a DB where in a DC many are excluded by their voluntary lack of participation.  Over the last two decades around 150,000 DB plans or about 85 percent have been frozen or closed as corporations shift retirement responsibility from themselves to the employee.(Prudential  12-2012)  More and more small businesses have created 401k Plans as a response to the growing demand to either defer income taxation for the highly compensated or offer competitive benefits.  Many Plan Sponsors view their 401k as one more cost of doing business.  If not done right it certainly can be costly so read on!

With the fall in popularity of the DB plan and the rise of the DC plan come other problems.  One of the most concerning for a Retirement Planner like myself is that many employees are ill prepared for retirement. But how can that be with so many plans available?  It comes down to personal accountability.  Take the fitness movement for example.  We have more gyms than ever and more overweight people too.  Many Plan Sponsor/Business Owners take the attitude, “I can lead a horse to water but I can’t make him drink” and while this is true, employees are not horses, horses are not eligible for the 401k and most importantly ERISA does not address horses but does specifically put the burden of employee 401k education on the back of the you the Plan Sponsor.  How you ask, by specifically designating the Plan Sponsor as a Fiduciary over the plan.  ERISA requires that the Plan Sponsor be focused on the employee’s success and benefit over his own.  DOL is so serious about this issue it is the only area I am aware of that puts the owner in the crosshairs of personal liability.  That’s right; a Plan Sponsors house maybe on the line if a litigious event arises.  Most Plan Sponsors assume the Corporate “vail” protects them but on this one issue it does not.  It is hard to dig this detail out of the Act, as ERISA’s forty thousand or so pages of rules are so confusing and difficult to navigate, it has become an area of specialization for Attorneys.

It seems that the Department of Labor which monitors these plans has cranked up its efforts to enforce growing infractions. 

Let’s run down a few facts I am hearing in the field today:*

The Georgia DOL Office has increased auditors from 3 to 177 in 5 years.

Fines in 1999 of 331 million surged to 1.7 billion in 2014.

DOL has stated a goal to audit 100% of Plans by 2018.

I hear many Plan Sponsors say “My Plan is not big enough to be audited”.  I respond with an over whelming NO to that argument. Consider this, 80% of employees work for small businesses.  Plans with over 100 employees must file an accountants audit report and a 5500 return to DOL so there is more oversight and reporting.  Clearly, fewer than 100 employee Plans are in the crosshairs of the DOL!

One of the most common infractions found is the failure to affirmatively distribute the 404(a)(5) Participant Fee Disclosure document to the participants on an annual basis.  This requirement includes individuals who have a balance in the plan and are no longer employed or on payroll.  The fine for this oversight is $100 per participant per day.  As you can see, fines can really add up.

So how can you prepare yourself? 

I suggest you work with a team of professionals that are familiar with the pitfalls of Plan administration, education, investment selection, monitoring and reporting.  If you are not working with such a team or not sure that you are and want a second opinion, I offer a Plan Review Process for a flat fee of $1,000.  In this process I review your record keeping platform and compare and price it against at least 4 of the top 10 providers of your sized plan.  This alone fulfils a requirement of ERISA that the DOL suggests you perform every 5 years.  I go on to confer with you the Record keeper and the TPA to ensure that other aspects of the Plan are being addressed accordingly.

If you feel compelled to prepare yourself by getting a second opinion on your plan, please call me at 404-456-0592.

*References:www.dol.gov, www.benefitspro.com, www.fiduciarynews.com


This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.