When 401(k) Plan Sponsors end up in trouble, it is often due to small things that were neglected or not given proper attention. Small mistakes can lead to big problems when it comes to the breaching of fiduciary duty. Below is a summary of mistakes made by Plan Sponsors that can lead to future problems and the breaching of fiduciary duty.
Mistake: Not Having Fiduciary Liability Insurance
- Every plan subject to ERISA is required to have a fiduciary bond. A bond is used to protect plan assets from theft. However, it is often assumed that a bond will serve as overall liability insurance for the Fiduciary. This is not true.
- Every plan sponsor should consider purchasing Fiduciary liability insurance. The cost to benefit ratio provided by liability insurance may be worth the investment.
Mistake: Not Hiring an Independent Financial Adviser
- It may seem obvious, but when this is not done, there is a lot of risk on the table for the Plan Sponsor. Fiduciary duty requires the highest duty of care in equity and law. The lack of a financial adviser for a retirement plan may signal a lack of duty of care by the Plan Sponsor.
Mistake: Not Having an Investment Policy Statement
- Just because your retirement plan has a financial adviser, doesn’t mean your retirement plan has a good investment policy statement.
- One of the most important tasks of a financial adviser is to develop an investment policy statement that serves to protect plan sponsors from lawsuits regarding investment losses.
- Any individual auditing the plan – from your 401(k) auditor to DOL to IRS auditor – will generally ask for the investment policy statement.
Mistake: Not Providing Investment Education to Plan Participants
- The more education provided to Plan Participants, the less liability Plan Sponsors may be subjected to. Under section 404(c) of ERISA, Plan Sponsors may be granted relief for the losses incurred by plan participants if the plan has provided adequate education to those participants.
Mistake: Not Reviewing Plan Expenses
- As a plan sponsor, you have a fiduciary duty to pay reasonable expenses, especially if your participants are responsible for supporting the bill. As the transparency of plan expenses has increased over the years, it has become more important for plan sponsors to review plan expenses and limit their liability.
- Reviewing means benchmarking, not just reading the expenses to make sure they sound reasonable with what you were told the charge would be. Benchmarking involves comparing the services you receive with similar services offered by other retirement plan service providers and determining if the cost you pay is reasonable based on available alternatives. Make sure to document this review.
By Josh Mitchell, CPAPosted on September 2 2014 by admin
As a plan sponsor, chances are that at some point throughout the course of business, the employee benefit plan that you manage has encountered plan forfeitures. Forfeitures typically result from the termination of service by an employee who was not fully vested in his or her employer contributions. The confusion related to forfeitures doesn’t revolve around how they came about, but more so how to handle them when they occur.
There are multiple options for the allocation of forfeitures per Internal Revenue Guidance (“IRS”) guidance, which include: they may be used to pay a portion of the plan’s administrative fees, provide additional contributions to participants (with the exception of safe harbor matches), or reduce the funds allocated to employer contributions. One common mistake that plan sponsors make is to post the funds to a suspense account, and let them build for multiple years without any utilization. The IRS and Department of Labor both recommend that forfeitures should be utilized in the year of generation or as soon as feasibly possible.
Some of the most common reasons that forfeitures are not properly allocated may be due to simple oversight, a plan sponsor may lack knowledge with IRS and DOL regulations, the assumption may be made that the TPA will handle it, or the plan document may not be clear in its guidance. The most important takeaway is to review the plan document in detail regarding forfeitures to ensure that the plan is utilizing forfeitures as allowed and within the appropriate timing, to ensure that there are no errors made. Improper plan and forfeiture management could potentially impact the tax status of the plan.
It is crucial to communicate with the TPA and plan auditors, if applicable, to fully understand plan guidance, and to periodically monitor forfeiture activity for a successful plan year.
By Sarah McFarlandPosted on August 19 2014 by admin
Most companies implement a 401K Plan in order to assist employees in planning for their future; in doing so, they wish to have high participation. If the current plan an employer has in place is not providing high participation, it may be worth considering amending the plan to adopt auto enrollment. Additionally, they may want to even include an auto escalation feature along with this amendment to increase employees’ contributions on an ongoing basis.
Why Auto Enrollment?
The main reason to have auto enrollment in a plan is to of course, assist employees in planning for their future and increasing plan participation. Additionally, auto enrollment assists employees in selecting investments, as well as if they choose to not select their own investments; then a default will be chosen for them. Most employees who choose not enroll into a plan choose to do so primarily because they are not aware of how these deductions will impact them and they feel that they do not know enough to select these investments.
When a plan makes the decision to implement auto enrollment, they may choose to consult with a professional in order to ensure that it is the best move for the plan, as well as to help make sure the participants have thoroughly reviewed their options. The plan will need to amend the plan document to ensure that it properly states that the plan is set up for auto enrollment. If this is a new plan, they will also want to ensure the plan has a trust as well as a recordkeeping system. Once these plans are in place, it is extremely important to follow the plan document as well as ensure that participants are notified of auto enrollment in advance.
Why Auto Escalation?
Auto escalation in a 401K plan is the option to have a participant’s contribution percentage increase annually by a certain percentage. Implementing this will help participants increase their savings year after year without feeling a large impact on their paycheck. Like auto enrollment, the plan needs to ensure that they have properly updated their plan document to allow for this implementation. It is important also to properly inform participants of this implementation, not to mention to continuously remind participants of these increases as they come around.
Although there is some work on the front end to implementing auto enrollment and auto escalation, if your plan is experiencing low participation, it may be something to consider in order to increase plan participation.
By Brie Keckler, CPAPosted on August 5 2014 by admin
What is Form 5500?
Form 5500 is the annual tax return for your retirement plan that must be filed with the Employee Benefit Security Administration (EBSA), a division of the Department of Labor (DOL). It is required by the Employee Retirement Income Security Act of 1974 (ERISA) to ensure employee benefit plans are operated and managed correctly. ERISA requires the plan administrator of certain ERISA plans to file an “annual report” with the DOL containing specified plan information.
Who is required to file Form 5500?
Every pension and group welfare benefit plan that is subject to ERISA is required to file a Form 5500.
When is Form 5500 due?
The plan must file the Form 5500 and any accompanying schedules by the last day of the seventh month following the close of the plan year. This means that the deadline is July 31st if your plan operates on a calendar year. You can get a one-time extension for two and a half months by filing Form 5558 with the IRS, but you must file this extension before your Form 5500 due date. This means that if your plan operates on a calendar year and you file an extension on Form 5558, then the extended deadline is October 15th.
How do I file Form 5500?
Beginning Jan. 1, 2010, all plans must file Form 5500s electronically for all plan years through EFAST2 (ERISA Filing Acceptance System, second generation). For more information on how to file Form 5500 see How to File- Electronic Filing Requirement instructions and the EFAST2 website at www.efast.dol.gov.
By Ryan Wojdacz, CPAPosted on July 29 2014 by admin
In April 2013, the IRS issued Revenue Procedure 2013-22 which provided much needed clarification regarding the fate of 403(b) determination letters. Prior to this, it was believed that the IRS would adopt a system of determination letters, similar to those issued for 401(k) plans. Revenue Procedure 2013-22 states that determination letters will not be issued for 403(b) plans. Instead, the IRS has provided pre-approved 403(b) plan samples.
A company can use the sample plan provisions and information package provided on the IRS website to draft or amend its 403(b) plan. In place of a determination letter, the IRS will issue a favorable opinion or advisory letter. However, the favorable opinion or advisory letter will not cover whether the plan satisfies ERISA requirements and other key items.
If you audit or are involved in the administration of a 403(b) plan, please visit the IRS website and ensure that your current plan is in compliance with the mandatory plan provisions.
By Rex Platt, CPAPosted on June 25 2014 by admin
If your company offers an employee benefit plan that is subject to the Employee Retirement Income Security Act (“ERISA”), for example a 401(k) plan, it is important to remember that your Company is responsible for ensuring that the Plan and any plan transactions comply with the fiduciary standards ERISA has created. Even though a Plan can implement thorough internal controls and oversight into the plan operations, inadvertent mistakes and errors still happen. These mistakes and errors can cause a Plan significant taxes and liabilities if uncorrected. Below is a summary of the Department of Labor’s (“DOL”) correction programs:
- Delinquent Filer Voluntary Compliance Program (“DFVCP”) – This program allows for Plans to file delinquent IRS Form 5500s with reduced penalties. This program cannot be used if the Plan and/or Plan Sponsor have been notified by the DOL of non-filings. The program includes two-steps. The first step is to file the delinquent Form 5500, ensuring to select filing under the DFVC program on the first page of the Form 5500. The second step is to pay the penalty and fees for filing under the DFVCP.
- Voluntary Fiduciary Correction Program (VFCP) – This program allows for Plans to correct certain violations before the DOL investigates or notifies the plan, and if no criminal violations are present. If approved by the DOL, the Plan will receive a “No-Action” letter that provides relief from the excise tax. Some transactions that are eligible for correction are delinquent participant contributions and loan repayments, loan amounts or duration in excess of Plan limits, and excessive or unnecessary compensation paid by the Plan.
If you have come across a plan error that needs to be corrected, reach out to your Plan auditor, third-party administrator or ERISA attorney for further guidance on which of the above correction programs is necessary for your Plan.
By Kevin C. Bach, CPA, CVAPosted on June 17 2014 by admin
Lost participants are those participants who have balances in the plan (unclaimed benefits) or have been distributed an amount from the plan (uncashed benefit checks) and cannot be located. The participant either doesn’t know or forgot they have a balance since their employment was terminated or have relocated with no forwarding address. The participant’s account could also have been distributed without the participant’s knowledge (an automatic distribution).
In the past, this issue has not been addressed by plan sponsors or independent auditors because the issue was not prevalent, and if it was, it was not “material”. In recent times, there have been trends leading to an increased risk in this area. These trends include the following
- Automatic enrollment into 401(k) plans
- Employees holding multiple jobs during their careers
- Employees leaving their accounts with previous employers
- Employers’ automatic distributions of accounts less than $1,000
As these trends continue to grow, the balances in the plans will become larger and need to be addressed. The Department of Labor (“DOL”) has yet to issue guidance on the plan sponsor’s fiduciary responsibility related to this; therefore, the plan sponsor, as a best practice, should have controls in place to address the unclaimed benefits and uncashed benefit checks. Some examples of best practices would include (but are not limited to) the following:
- Monitor and track uncashed checks with the assistance of either the custodian or the third party administrator (“TPA”).
- Monitor and track unclaimed benefits remaining in the plan, utilizing the DOL’s safe harbor plan of rolling over accounts less than $5,000 to an IRA.
- Use the various methods available to locate lost participants (i.e. commercial locator services, credit reporting agencies, internet search tools).
By Leslie Lee, CPAPosted on June 10 2014 by admin
Most plan administrators understand that there is accounting involved to track their benefit plan’s financial performance including but not limited to contributions to the plan, distributions out of the plan, and interest and appreciation/depreciation of investments held by the plan. However, most plan administrators do not become overly concerned with the accounting entries that are made, adjusted and grouped to create the benefit plan accounting records because these accounting tasks are generally prepared by the third party administrator. This lack of concern could create unnecessary financial statement risk for the benefit plan, as unauthorized or incorrect journal entries could potentially misstate the financial results of the benefit plan. Accordingly, the review and approval of journal entries, especially manual journal entries, is imperative to ensure proper financial reporting results are maintained and reported for your benefit plan.
Here are some general steps (although not all inclusive) that a plan administrator can perform in order to obtain comfort over the manual journal entries posted to the benefit plan accounting records:
- Understand which third party administrator is preparing your plan’s financial records. If there is more than one party, understand the difference in financial reporting results (if any).
- You should understand how each transaction is recorded. For example, every contribution and distribution may be an entry that is systematically transacted/journalized when the transaction is entered, and this entry is typically known as a systematic/standard journal entry. A manual journal entry occurs when an individual manually selects the specific financial statement accounts to journalize a specific transaction to.
- Inquire with your third party administrator that prepares your financial records, and obtain an understanding of how they track systematic/standard versus manual journal entries. Obtain a listing of manual journal entries (if any) and review for propriety.
- Review your third party administrator’s SOC-1 Report (if applicable) and determine how manual journal entries and financial statements are prepared. Ensure consistency to the reports and actual procedures you identify for your plan.
- Obtain a listing of transaction data by type (i.e. contributions, loan issuances, loan repayments, distributions), and reconcile the totals to the financial statement totals.
- Obtain a listing of transaction data by type (i.e. contributions, loan issuances, loan repayments, distributions), and reconcile to plan administration records (if maintained).
- Ensure that the third party administrator will only accept financial statement transaction requests from members of plan administration that are properly authorized with the third party administrator.
- Review your plan’s financial statements for any line items that are labeled as manual adjustment, or adjustments, or that appear to be indicative of a non-standard journal entry.
These are just several examples of understanding and identifying manual journal entries made to your benefit plan’s financial records. If you have any questions, or would like to learn more about why this review procedure is important, please feel free to contact us.
By Victor FuentesPosted on June 3 2014 by admin
If you are about to undergo a 401K audit, there are many things that can be done to ensure that the audit goes smoothly. This means getting audit packages ready early on, being in contact with the individuals that are involved and following up on open items. When these simple steps are followed there will be greater efficiencies on your audit and each year they will get better and less burdensome.
Get in touch with your Auditors early on
It’s a good idea to contact your auditor 3 or 4 months prior to when you would normally have your audit scheduled. This way you can discuss fees, timing, and even go over things that went good or bad in the prior year, so if necessary the auditor can plan to revise the approach. Once you have contacted them and gone over these details you can schedule out the timing for the audit and this gives them time to get out any selections or requested items well before the audit. This way you can pull these items in advance and it doesn’t pile up in the last few days before the audit.
Contact your Custodian
Once you know the timing of your audit it is a good rule of thumb to reach out to your TPA 2 months prior to the audit. This way you can get access for the auditor and it helps the custodian plan for getting your audit package ready. Once you have given the auditor access and the audit package, the auditor can begin to make selections.
Get documents pulled prior to the arrival of Auditors
Once the auditor has given you their requests as well as the sample selections, start getting these items completed and pulled. It is in our nature to procrastinate and wait until we have to do something; however, this can really slow down the audit. The more items you can get completed prior to the auditor’s field work the better. There are many items that the auditor can begin to do from the office. This assists the auditor to properly prepare for the audit as well as to know what questions they may have for you while they are out conducting the audit.
Follow-up after the audit is complete
Finally, once fieldwork is complete follow-up to ensure that any remaining open items are complete. This will assist with getting the audit finalized and ready for issuance. If these items don’t get wrapped up quickly after the audit, it becomes difficult both for the client as well as for the auditor and custodian to be able to find the additional time to dedicate to the audit and can lead to inefficiencies and a dragged out audit.
Following these simple steps will create ease in your audit and you will notice that each year that these steps are followed the audit will become much easier!
By Brie KecklerPosted on May 13 2014 by admin
The average American doesn’t give proper attention and consideration to retirement financial planning for a variety of reasons (excuses). Perhaps you don’t have time in your day-to-day life to squeeze in financial planning because it seems complicated and time consuming. Maybe you think it can be done next year; what’s the rush to do it this year? These attitudes, along with a lack of financial planning education, are part of the reason so many Americans are in a bad retirement situation. However, you don’t have to be one of those individuals. Summarized below are 10 of the most important steps you should be doing right now if you plan to retire within the next 10 years, according to Scott Spann, CFP (a.k.a The Money Doc).
- Write down your life goals, not just your retirement goals. Think about all areas of your life: family, career, social, health, personal, retirement. Set S.M.A.R.T goals – Specific, Measureable, Attainable, Realistic, Timely.
- Analyze your personal spending plan. There are many online budgeting tools available to analyze your spending such as Mint or Personal Capital. Take advantage of one if you have trouble managing your spending. Identify where your money is going and start to create a budget plan for retirement.
- Maximize your usage of tax advantaged accounts to maximize the value of retirement funds. Know the IRS contribution limits – $17,500 for 2014 ($23,000 for ages 50 and older). Consider investment alternatives: taxable brokerage accounts, buying property, etc.
- Run multiple retirement calculations. You will be surprised at how many free services there are, such as Google retirement calculations, to provide you with a ball park estimate on what your financial future will look like after you’re no longer working. Review your own calculations and retirement goals with a Certified Financial Planner.
- Review your health insurance coverage options. This is the number one concern for soon-to-be retirees. Health costs can make up a significant portion of the retirement budget.
- Consider obtaining long term care insurance. Main options: self-insure by padding your retirement budget, spend down assets to qualify for Medicaid, or purchase long-term care insurance.
- Have a plan to eliminate your remaining debt. Debt free is the best way to live in retirement.
- Re-Assess your tolerance for risk. As you age, your appetite for risk is bound to change. Think realistically about what you’re willing to do.
- Update your estate planning documents. Wills, durable power of attorney, health care power of attorney, and advanced health care directives are all things you should take time to put in place.
- Estimate your pension (if you have one) and Social Security income. Knowing your future streams of income will help you budget.
By Josh Mitchell-- Older Entries »
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
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- Fiduciary Duty Advice for 401(k) Plan Sponsors: The Small Things Matter
- How to Handle Forfeitures
- Benefits and Preparation for Auto Enrollment and Auto Escalate in a Benefit Plan
- What You Need to Know When Filing Form 5500
- Determination Letters Will Not be Issued for 403(b) Plans
- Plan Corrections Necessary? DOL Corrections Program
- Journal Entries for Benefit Plan Accounting
- Tips to Prepare for a Retirement Plan Audit
- 10 Steps to Put on Your Retirement Planning Checklist
- How is Compensation Defined?