The 411 on Employee Benefit Plans

Most the answers can be found in archived blogs on this site – “the 411 on Employee Benefit Plans” Don’t have time to read through them? Post a question and we will be happy to help. 

1. What happens to my account when my Employer sponsored 401(k) Plan incurs a partial plan termination?

a) Your employer has terminated the 401(k) Plan and you will have lost all money contributed to the Plan to date.
b) You were a laid-off employee during the Partial Plan termination year, and as such you will automatically be fully vested in accrued benefits, to the extent funded on that date, or in the amounts credited to your account. 
c) Every employee in the company is automatically fully vested in all account balances. 

Hint – read article “Partial Plan Termination” – June 30, 2009 – authored by Jonathan Poppel, CPA.  

2. My employer notified me that they have an automatic enrollment feature to their 401(k) Plan, and I will be automatically enrolled after 3 months of working service. Which of the following is true?

a) I have no alternative, and I have to contribute the auto-enrollment minimum as required by my employer.
b) I don’t have to worry about tracking my 401(k) contributions or options, as my employer will pick the best fund to invest my money in, and they will ensure that I am enrolled in 3 months time.
c) I have the option to “opt-out” of the auto-enrolment feature, and I should ask my employer for the applicable forms to make this election. 

Hint – read article “Streamlining of the Automatic Enrollment Process” – October 6, 2009 – authored by Shelby Williams
3. True or False:  My employer mentioned that they pay all administrative expenses incurred by the 401(k) Plan. Accordingly, my individual account incurs no fees, and I don’t have to worry about “outrageous” investment fees. 

Hint – read article “The FYI on 401(k) Plan Fees” – November 17, 2009 – authored by Joe Goodmiller

4. My plan administrator told me that I will earn my employer match based on a vesting schedule.  The vesting schedule is:

a) a tiered schedule for what percentage of your income you can contribute
b) a tiered schedule for when money the employer contributes to your account is yours/earned.
c) A tiered schedule for the penalty you have to pay depending on your age, if you take your money out early.

Hint- its not letter “a” or “c”. Also – you can find this information in your “Summary Plan Description”, which can be provided by your plan administrator.

5. I am a plan administrator and I was recently out from work for 6 weeks due to illness.  No one at work knew how to remit the employee 401(k) contributions to the third party administrator; however we did make sure we deducted the contributions per the participants elections, so we are not out of compliance with regulations, right?

Not exactly.  The DOL Reg. 2510.3-102, “Definition of ‘Plan Assets-Participant Contributions,” states that employee contributions (including amounts withheld and elective contributions) become the Plan’s assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets, but no later than the 15th business day after the end of the month from the date on which such amounts are received by the employer or withheld from wages. If the employer does not comply with the regulation, this could be considered a prohibited transaction and should be reported in the annual filing. In some cases the DOL may rule that if the employee contributions were not remitted based on average lead time, than that would constitute a prohibited transaction.  If this has occurred, then you would want to talk to your third party administrator on how to “self-correct” this issue. 

Victor Fuentes

Plan fiduciaries understand that there are critical responsibilities related to the 401k plans that they oversee.  However, a review of recent court rulings can help reinforce the seriousness of those responsibilities.  Here are some recent court rulings involving fiduciaries oversight of 401(k) plans.

Phones Plus, Inc. v. Hartford Life Ins. Co., No. 3:06-cv-1835 (D. Conn., motion filed 2/11/10).
A partial settlement of $13.8 million was authorized by a federal court in Connecticut in a class-action civil suit filed on November 14, 2006, on behalf of Phones Plus, Inc., against The Hartford Financial Services Group, Hartford Life Insurance Co., and Neuberger Berman Management. The suit alleged that the defendants violated ERISA by entering into revenue-sharing agreements and arrangements with various mutual funds. The settlement involves the administrators of 401(k) plans that used Hartford Life Insurance as the administrators of their 401(k) plans.

Jeremy Braden v. Wal-Mart Stores
The Eight Circuit Court of Appeals, on November 25, 2009, reversed the 2008 dismissal of a class-action lawsuit filed by Jeremy Braden on behalf of more than one million employees of Wal-Mart. The suit alleges that participants in the 401(k) plan lost tens of millions of dollars due to the company’s lack of effort to negotiate lower-cost institutional funds. In the reversal, the Eight Circuit Court stated that Wal-Mart’s method of selecting funds for its 401(k) plan was “tainted by failure of effort, competence or loyalty.”

Hecker v. Deere & Co
The U.S. Supreme Court, on January 19, 2010, rejected a review of the June 2007 dismissal of a lawsuit alleging that Deere & Company, Fidelity Management Trust and Fidelity Management and Research violated their fiduciary duties by charging unreasonable fees for plan investment options. The dismissal was affirmed by the U.S. Court of Appeals in Chicago on February 12, 2009. The case was rejected by the U.S. Supreme Court without comment.

Joe Goodmiller

The Employee Benefits Security Administration (EBSA) plans to amend the regulatory definition of “fiduciary.” A large number of plan sponsors rely on the services of pension consultants and financial asset appraisers. As such, in June 2010, EBSA will propose to amend the current definition to include these service providers, essentially making them subject to the fiduciary responsibility rules established by ERISA. According to Phyllis Borzi, Assistant Secretary of Labor for the EBSA, “The DOL is concerned about conflicts, the fact that there may be consulting services provided in a conflicted manner where the self-dealing restrictions presently do not apply.”

The current regulations state that consultants and investment advisers are generally not considered fiduciaries unless they exercise discretionary authority or control over a plan’s investment transactions or meet a five-part standard. One of the major concerns with these current fiduciary regulations is that they don’t require consultants to disclose all of their compensation arrangements to plan sponsors. Many consultants will avoid fiduciary duties by stating in their contracts that they provide information and non-fiduciary advice to plan sponsors who have fiduciary responsibility over the plan. Another concern is the third-party payments that some investment consultants receive when retirement funds hire money managers recommended by the consultants. Plan sponsors can expect more protection from financial advisers and consultants that act imprudently by subjecting them to ERISA regulations.

Joe Goodmiller

With the ever changing regulatory landscape surrounding employee benefit plans, it’s important that the plan sponsor consider the impact of regulatory changes.  As discussed in previous blogs, there are a significant number of fiduciary responsibilities bestowed upon a plan sponsor.  One of these responsibilities is to keep the plan in compliance with all current laws and regulations.  Since the laws and regulations governing employee benefit plans can change from a multiple number of sources, including the Internal Revenue Service and ERISA, amongst others, it is important that the plan sponsor have regular communication with its plan attorney to determine any plan amendments that need to be made. 

Plan amendments decrease the administrative burden of redrafting entire plan documents and should be seen as a necessary requirement under any employee benefit plan.  They not only keep the plan current with laws and regulations but also are used to document and communicate changes in the plan elected by the plan administrative committee.  However, as plan amendments become substantial, plan sponsors may need to consider incorporating and redrafting all plan documents in order to incorporate the amendments in simple, easy to understand documents.  Until such time, the plan sponsor should formally approve all plan amendments and communicate these amendments to plan participants in a timely fashion.

Jonathan Poppel, CPA

Plan sponsors have a fiduciary responsibility to manage the investment options offered to participants. ERISA requires that these investments be monitored on an ongoing basis for appropriate use and continued prudence. In order to ensure this happens, plan sponsors should establish an investment committee to oversee and manage all investment processes for the plan. The investment committee is usually separate from the benefits committee, who are responsible for non-investment related issues. Some objectives and responsibilities of an investment committee are to:

• Establish a formal process to manage investment strategies.
• Initiate investment decisions.
• Analyze and monitor investment related expenses.
• Develop an investment policy statement and document all decisions made.
• Establish due diligence procedures for selecting and monitoring investments.
• Review the activities of “prudent experts.”
• Review the investment management fees paid by the plan and participants.

Establishing a committee involves choosing committee members and drafting a charter. Committee members normally are senior members of Human Resources, Finance and Operations, and are normally headed by Chief Financial Officers or others who have an understanding of capital markets. It is recommended to keep investment committees small and to have an odd number of voting members, such as 3 to 5 members. The draft charter should define the purpose of the committee, the members and their status in the committee, and the frequency of meetings held by the committee. Each member’s acceptance in the committee, along with their positions and duties, should be formally documented in writing. The committee should meet quarterly or semi-annually with the duration of meetings being sufficient to review and resolve all issues. Minutes should be kept and all documentation should include dates of meetings and an accurate account of all discussions and decisions made throughout the entire duration of the meeting.

Joe Goodmiller

In these tough economic times, many 401k plan administrators are looking to reduce third party administration fees.  Since fees are commonly based on the number of participants, plan administrators would be deficient in their responsibilities if they didn’t remove terminated employees from the plan where allowed.  The IRS allows plans to make mandatory distributions to terminated employees.  To make full use of these provisions, there are just a few simple items that need to be addressed. 

First you need to be sure that your 401k plan agreement has been amended to properly allow for these mandatory distributions and that the provisions are in compliance with the current regulations.  In 2005, the regulations were changed to reduce the mandatory cash-out limit to $1,000.  (i.e. you could only do mandatory cash distributions for participant account balances less than $1,000).  However, the current regulations do allow for mandatory rollovers to IRAs of accounts balances of less than $5,000.  Your plan’s third party trustee will usually either offer to administer these IRAs or will have an affiliate who will provide these services.  A typical 401k plan allows for mandatory cash-outs for account balances less than $1,000 and mandatory rollovers for account balances between $5,000 and $1,000.

Second, you need to be sure that your third party participant account administrator (“TPA”) is aware of this plan provision and that they assist you in making these distributions.  Most TPAs are familiar with these provisions and will initiate these distributions for participants who meet the criteria.  However, even the best TPA can’t make these distributions if the plan sponsor does not keep their participant census data accurate and updated for employee terminations.  If you only update your census data at year-end, you could have paid almost a year worth of participant administration fees for employees who terminated early in the year.

Lastly an added benefit of keeping your participants limited to only active employees is that you might be able to eliminate your need for an annual audit.  The audit requirement is based on the number of eligible participants which includes participants with account balances whether or not they are current employees.  Accordingly, former employees that leave their accounts in plans could potentially push plans over the audit requirement threshold.

Making full use of allowed mandatory distributions is an effective tool to manage 401k administration fees.
 

Kim Lubbers, CPA

When one receives a third party administrator’s SAS 70 report, there are a few things he or she should know about the information that is being provided to them in order to gain the maximum benefit from reviewing the report.

There are two types of service auditor’s reports. The two types of reports provided in a SAS 70 audit are the Type I and Type II reports. A Type I report will give a description of controls in place at the service organization at a particular point in time. A Type II report not only gives the description of the controls, but also includes testing of these controls over a certain amount of time which will not be less than six months (normally, a year is included in the report). The Type II report offers the user of the report to review not only the controls in place at the service organization, but also how each of these controls is operating. If a certain control is not working properly, the user can mitigate the risk at the Plan level by implementing controls needed to adequately protect the Plan participants. Additionally, the Plan trustee might determine that the service organizations services are not adequate that they should be replaced.

To review the controls in place at a service organization, find the section of the report that details the control objectives and related controls. Just so you can see how important the controls are at a service organization, I will provide a few examples of the control objectives being reviewed.

1. Controls provide reasonable assurance that telephone calls from participants are authenticated and resulting transactions are processed by Customer Support Services in an accurate and timely manner.
2. Controls provide reasonable assurance that monetary transactions are authorized and processed accurately, completely and timely in accordance with instructions received.
3. Controls provide reasonable assurance that investment purchases and sales are processed accurately and timely.
4. Controls provide reasonable assurance that participant account balances are valued based on market prices obtained from authorized pricing sources and investment income is accurately and timely allocated and recorded.

As you can see by reading the control objectives above, how controls are operating at a service organization is incredibly important to ensuring a Plan participant’s 401k account including his or her investments are being managed and accounted for. As a user organization with fiduciary responsibilities, it is your responsibility to make sure that adequate controls in the above areas are in place.

The SAS 70 has a great benefit to the user as he or she is able to gain valuable knowledge of how the third party administrator is operating and how well they are implementing the controls they have in place. The user also gains trust in the third party administrator knowing that someone independent of the organization has reviewed and tested the effectiveness of their controls. Another great benefit to having a SAS 70 available is that the report is able to assist the user’s auditor in reducing the audit procedures to be performed during the audit of the Plan’s financial statements.

Shelby Williams

401K plan forfeitures occur when a participant terminates employment (voluntarily or involuntarily) prior to satisfying the required Service Years to become fully vested in his/her account.  Required Service Years will vary by plan, but can be found in your Summary Plan Description. The portion of an individual’s account subject to forfeitures is the portion that is contributed by the Employer, typically, through an Employer matching contribution, or an Employer discretionary profit sharing contribution. Participants are generally, always 100% vested in the contributions made by the Participant.

Plan Administrators can typically utilize forfeitures to pay Plan expenses, to reduce Employer matching contributions or Employer discretionary profit sharing contributions, or to allocate to existing participants on a pro-rata basis.  (Specific uses are governed by the Plan Document). 

Example
The following example assumes an Employee has satisfied three Service Years, and the Employer has contributed $1,000 to the Employee’s account.  Additionally, the Plan has the following vesting schedule documented in its Plan Document.

Service
Years         Vesting % Earned
1                    20%
2                    40%
3                    60%
4                    80%
5                    100%

Given the detail above, the individual is 60% vested in the Employer contributions, and will receive $600 of the $1,000 in the account.  The formula for the forfeited portion is “Forfeited portion = Total Employer contribution balance * (1 – % vested)”.

As a participant it is important to know your 401K Plan’s forfeiture and vesting policy documented in your Plan Document (can also be found in Summary Plan Description) to ensure the following:

1. The proper amount of termination benefit is paid to you, upon termination.
2. If you have received an underpayment of termination benefits, the Plan may be responsible to compensate you for the underpayment, and any lost earnings potential on that underpayment.  
3. If you have received an overpayment of termination benefits, you may be obligated to reimburse the Plan by the overpayment amount. 
4. The Plan Administration is properly utilizing forfeitures received, (i.e. if forfeitures are to be remitted to existing participants, then you will want to ensure you receive your correct portion). 

Some issues that typically result in forfeiture calculation errors are: a) the participant has a “break in service” (an extended absence from employment), b) the Plan Document is amended and also amends the vesting schedule, c) Partial plan termination is incurred, and d) inaccurate records of Employer contributed balances versus Participant contributed balances.  The previous issues should be carefully considered when verifying if your forfeitures were calculated correctly. 

Victor Fuentes

One widely recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA) is the Statement on Auditing Standards No. 70 (SAS 70). It is important for Plan Fiduciaries to understand what an auditor’s examination performed in accordance with SAS 70 is, and how it can help the fiduciary to perform the duties that come with such an important role.

According to www.sas70.com, the SAS 70 audit “represents that a service organization has been through an in-depth audit of their control objectives and control activities, which often include controls over information technology and related processes.” Most third party administrators have had SAS 70 audits performed and can furnish the Plan Fiduciary with the report when requested. When a Plan Fiduciary receives the report, they can review it for information about the control objectives and control activities that are in place at the third party administrator’s company.

As a Plan Fiduciary, one has a great amount of responsibility to the plan participants. By obtaining and reviewing the SAS 70 report, the Plan Fiduciary is performing one important aspect of his or her duties. The report will be able to give the Plan Fiduciary the ability to decide that the plan is in good hands with their third party administrator and that nothing is being overlooked. It is also a useful tool in determining if additional controls need to be put into place at the Plan Sponsor level to compensate for controls that may not be functioning correctly or are not in place at the third party administrator level. The Plan Fiduciary must remember that they are ultimately responsible for any issues that may arise concerning the plan and plan participants if their money is not adequately protected. 

Please take a moment to request a SAS 70 report from your third party administrator or review the yearly SAS 70 report that you may have already received and gain an understanding of the controls in place to protect your plan participants.

Shelby Williams

According to ERISA, all qualified company retirement plans have certain fiduciary responsibilities for managing the plan assets with the care, skill, prudence and diligence of a prudent expert and by diversifying the investments of the plan so as to minimize the risk of large losses.

To assist in adhering to those responsibilities, it is good practice for all plans to adopt a formal investment policy outlining the roles and responsibilities of fiduciaries involved in the plan’s administration and management. Investment policies address permitted investments, asset mix, and the method of monitoring overall return on investments. It is essentially the governing document for all plan investment decisions.

While investment policies can vary as much as the plans and organizations that adopt them, here are the basics of a policy:

1. Statement of purpose – Most commonly the purpose is for the plan to act solely in the interest of participants and beneficiaries.

2. Roles and responsibilities of key decision makers – This includes the governing board, the internal staff, fund managers, consultants, participants, record keepers, etc.

3. Standard of care – This is the degree of prudence required of the plan fiduciaries.

4. Scope of investment options – This outlines the allowed funds that the organization will use to encourage plan participation and provide diversification.

5. Reporting and monitoring – This provides guidance for the structure to report and monitor plan investment results.

Other elements of an investment policy can include descriptions of performance measurements and benchmarks used by the plan, guidelines for portfolio rebalancing, and a schedule for revisiting the investment policy itself.

Jessica Puckett, CPA, CFE