Retirement plan sponsors have a lot of headaches and liability because of their role as plan fiduciaries. Below you will find some proactive steps that plan sponsors can take to decrease their potential liability:
- The threat of the DOL and IRS auditing your 401k plan must be taken seriously
The DOL audits small to medium sized employee retirement plans frequently. These plans have the potential to get sued for breaches of fiduciary duty. A plan sponsor should perform internal compliance reviews as they are far less costly than penalties on plan audits. - Review Plan Terms
Failure to operate the plan according to its terms is breach of fiduciary duty and risks the plan to penalties from the IRS with plan disqualification as the ultimate penalty. Sponsors should know how the plan defines compensation. Does it include bonuses? Is it taxable wages or total wages? The amount to be withheld from the participant’s salary depends on which amount constitutes compensation. - Review Plan Type and Contributions
A plan sponsor should periodically review whether the retirement plan still fits their needs and whether the plan’s method of allocation should be changed based on their economic conditions. Can the sponsoring company still afford their defined benefit plan? Is the small plan restricting how much money they can put away for their top employees? Can the sponsor afford safe harbor contributions to avoid discrimination testing? - Review Plan Administration
The administration of a retirement plan is technical and requires precise recordkeeping and discrimination testing. These requirements are needed to preserve qualification as a tax-deferred entity. Errors in the administration of the plan can threaten a plan’s qualification and expose the plan sponsor to potential liability from the IRS, DOL, and plan participants. A periodic review of the TPA’s work by an independent party may discover issues that typically are only discovered years later. - Review the Fiduciary Process
Plan sponsors have the misconception that the role of a financial advisor is to pick out investment options, no more and no less. The role of a financial advisor is to help a plan sponsor manage the fiduciary process. That means the development of an investment policy statement (IPS), implementation, review of plan investment options based on the IPS, as well as giving education to plan participants. - Fee disclosures
A big change that took place in 2012 was the implementation of new fee disclosure regulations. As part of the new requirement, each covered service provider must disclose detailed information to plan sponsors about fees charged and the services provided by those fees.
It has become increasingly important for plan sponsors to better understand their fiduciary and compliance obligations. For more information please contact Maria Arriola, LSL CPAs Shareholder, at 949.829.8299 or [email protected].
*First published in the Employment Resources & Solutions supplement in the OCBJ Journal – June 13 Issue
