For employees, a company-sponsored retirement plan is a cornerstone of their financial future, and a tangible measure of their employer’s commitment to their well-being. Operational mistakes with the plan strike at the very heart of that relationship, eroding trust. Oversights, like failure to make timely deposits of deferrals to retirement accounts, can also trigger costly government penalties, and even ERISA litigation. The foundation of a successful company sponsored retirement plan is diligent, proactive management and monitoring. While errors are inevitable, the failure to actively seek, correct, and mitigate them is not. Read on to understand the most common mistakes, so you can avoid making them.
Discovering Mistakes
When you sponsor a retirement plan, you are automatically a fiduciary under the high standards of ERISA, so, as attorney Ary Rosenbaum explains: “you have a higher duty of care when handling the money belonging to other people than you do with your funds.” Given the trust employees (and the government) place in you to protect their money and put them on the path to a successful retirement, it’s imperative to avoid operational failures. Assurance, tax and consulting firm, RSM reminds us, mistakes do happen, and that’s why it’s essential for retirement plan sponsors to proactively conduct regular and thorough reviews:
Operational failures in retirement plans can create significant consequences, threatening both regulatory compliance and employee trust in the organization’s commitment to their financial future. Correcting these issues….can also involve substantial costs….If left unaddressed, the consequences can escalate further, exposing the organization to regulatory penalties and increased scrutiny during audits. Regular, thorough reviews of plan document terms and the practices of both the employer and plan service providers can significantly reduce…errors….Mistakes often arise when employers neglect to actively manage their retirement plans, assuming all is running well because it has in the past or relying too heavily on automated processes without ensuring proper policies and procedures are in place. Whenever there are changes in personnel handling retirement plan matters, payroll systems, or plan providers, the policies should be revisited to ensure ongoing compliance…. With diligent oversight and proactive management, plan operational failures can be effectively mitigated.
Imagine how unsettling it can be for even one employee to discover a miscalculation or timing discrepancy related to their hard earned retirement funds? Are you sure your plan has not made a mistake? Chances are good that most thorough reviews of retirement plan operations will identify areas for improvement. Mistakes are a fact of life, but ignoring them and letting them fester and repeat in retirement plan operations is not acceptable, and exposes plan sponsors to major consequences “including costly penalties, required corrections, and even disqualification of the plan by the IRS. Beyond regulatory risks, such mistakes can erode employee trust and damage an organization’s reputation.” RSM encourages retirement plan sponsors to put strong internal controls and monitoring processes in place, so that errors can be caught and addressed promptly, and offers this list of 10 common mistakes to look out for:
- Uncashed checks and missing participants
- Failure to timely deposit deferrals
- Failure to timely apply forfeitures
- Failure to properly administer automatic enrollment
- Failure to include all eligible employees
- Failure to use the correct definition of plan compensation
- Failure to issue required minimum distributions (RMD)
- Failure to follow hardship rules
- Failure to follow participant loan rules and violations of Internal Revenue Code…
- Failure to amend a plan for legislative changes on a timely basis
An Ounce of Prevention…
In addition to taking internal controls and monitoring seriously, best practice for retirement plan sponsors includes securing protection for themselves. Even with extreme diligence, mistakes are likely to occur, and when they do, defense against ERISA investigations and allegations is costly, averaging upwards of $600 per hour.
As a retirement plan sponsor, you can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries. Outsourcing plan services does not free you from these risks: as a sponsor, you choose the service providers and remain ultimately responsible for their performance. You can, for example, be held personally liable for:
- Compliance: Do operations adhere to the plan document, and government regulations? Are you up to date with all cybersecurity protocols?
- Decisions: Do you have the right advisor, and investment options?
- Cost control: Are the plan fees reasonable and services solid? Have you monitored?
- Cybersecurity: Are you adequately mitigating threats to the plan, and ensuring all service providers have strong protocols in place too?
If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance. Colonial Surety Company offers an efficient and affordable Fiduciary+ Cyber Liability Insurance bundle specifically to protect retirement plan sponsors. For an annual cost that’s less than just one hour with a defense attorney if trouble strikes, you’ll be armed with:
- $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.
- Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident.
Get protected now: Fiduciary+ Cyber Liability Insurance
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