March 26, 2015

Are your 401(K) dashboard lights flashing?

A few years ago my wife surprised me on my 40th birthday with a new truck. It was what I always wanted. It was my version of a big-brand luxury or sports car.

Yes, I am that simple.

If you have gotten a new vehicle lately, there’s a bit of a learning curve on the new technology, sensors and indicators that are now pretty standard.

I had to get acclimated to new warning signs so I will know what is happening if any of them are ever triggered.

Most clients of ours have heard us say from time to time, “it’s not only what you know that can hurt you, but it’s also what you don’t know. Do you KNOW what you DON’T KNOW?

If you are a business owner who offers a qualified retirement plan for your employees, you may not realize how much scrutiny 401(k) plans are under. Regulators are beefing up their audit and compliance staff to make sure plan sponsors (you) are complying in form and operation. You bear a great responsibility and need to know how to properly operate the 401k vehicle and understand what the dashboard lights indicate.

There are quite a number of gauges, warning lights and indicators that come with offering a plan, here are 6 key areas you need to know are working properly and continually monitor:


1.     Failure to comply with plan document

One of the great responsibilities of providing a qualified retirement plan and reaping the benefits of its many tax advantages is complying with the requirements of IRS Code section 401(a). Your plan document captures those rules. Plan documents are written with options allowing you to custom design your plan while honoring the IRS code. If you fail to comply with the plan document, you can incur severe penalties and fees or jeopardize maintaining “qualified” status on your plan.

Since the plan document is where all of the features specific to your plan are detailed and defined, there are quite a few issues that could trigger the dashboard light to come on – similar to the “check engine” light.

Who’s eligible and when, can they take loans, hardships, etc.? Are you providing a match? If so, what is the formula and the vesting schedule? Get to know your plan document and its provisions and make sure you follow it. 

2.     Failure to offer a diverse selection of investments and continually monitoring them 

Under ERISA law, the Department of Labor (DOL) requires plan fiduciaries to diversify plan investments and to select investments in a prudent manner. According to DOL, a diverse range of investments exists when the opportunity exists for a participant to:

  • Materially affect the potential return in his individual account;
  • Materially affect the degree of risk the account is subject to;
  • Choose from at least three diversified core investment categories; and
  • Diversify so that the portion of the account that the participant controls has minimum risk of large or inordinate losses.

As you can see, the hurdle is not high. However many funds you offer, make sure you document why those funds were selected and made available to participants. Also, make sure that you are continually monitoring those funds against their peers, be it quarterly or semi-annually. Most providers do a good job of providing research on fund performance and expenses on their websites. Remember to make quarterly reports available to anyone who does not have online access.

3.     Not depositing employee deferrals in a timely manner 

This seems to be a no brainer, yet it is the most violated rule discovered in DOL audits. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to separate them from company assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. (Most audits find they can be reasonably be made sooner.)

If you have fewer than 100 participants, you have an even shorter time horizon. Salary reduction contributions will be compliant if they are deposited with the plan no later than the 7th business day following withholding.

4.     Not providing required notices to participants 

There are plenty of forms of communication between you and your employees that you must make each year to keep this dashboard light off. Much of it depends on the type of plan that you have. Again, part of your job as a plan fiduciary is to educate your employees on what the plan is, what it can do for them, how they can take advantage of it, how much it costs them and any precautions along the way.

You have to communicate with participants any time you change the plan, the investment options or the provider. Keep all of those notices and announcements either as a hardcopy or electronically. And keep them organized. If the light goes off (DOL audit), you know where to find them and prove they were distributed.

5.     Not knowing if your plans fees are reasonable 

Fees and plan expenses have been under the microscope for the last several years. As a fiduciary, your role is to act in the best interest of the participants and part of that is to make sure that your participants are not paying too much for their investments. Your provider should make the information readily available t\o you through quarterly or annual reports. However, they merely report it. They do not benchmark your plan against others in the 401(k) universe.

Similar to comparison shopping for a new vehicle, you need to see how your plan stacks up against its peers to make sure that the expenses of the plan are reasonable for the service, communication and information that is provided. Make sure you document the comparison.

6.     Not making education available to participants 

As I mentioned before, you have a duty…a responsibility to your participants. In simple terms, the regulations really say, do what is best for them. All too often, we find that plans are set up and forgotten.  You should demand that the provider and/or advisor to meet with your employees on a regular basis. Educate them on investing basics, importance of retirement savings and the plan details. Allow group and one-on-one meetings. Document every meeting and every attendee. In many ways, this is your oil light. If you are communicating with participants and providing education, you will reduce the chance that any of them complains that you have failed them.

As you can see, there are many moving parts to providing and maintaining a qualified retirement plan. There are plenty of regulations and rules.

If you neglect scheduled maintenance and proper care, your dashboard lights will be flickering continually.

Know how to keep them quiet and keep your plan healthy.