Lately, there’s been a lot of buzzing about the importance of benchmarking the investments and fees associated with company sponsored retirement plans. While it is indeed obligatory to be vigilant about performance and fees, experts remind plan sponsors that fiduciary responsibilities involve a whole lot more, including plan operational issues.
Identify The Fixes Needed
Retirement plan experts explain that ideally, a complete operational view of the plan should be conducted annually “in order to limit the impact of operational errors already made and to identify operational improvements that can prevent future errors.” Compliance problems that frequently fly under the radar include plan operations that are out of sync with the plan document, as well as emergent laws and regulations. As Genelle Brakefield, a vice president at third-party administrator Ekon Benefits points out: “If you don’t look, you don’t know what’s going on….The nice part about doing these assessments frequently is that the faster you can identify a problem, the faster you can fix it… Speed is our friend, in this case.”
Plan sponsors wondering how to begin a review of plan operations can start with the 401k Plan Fix-It Guide provided by the IRS. Awareness of the 12 most common errors associated with retirement plan operations, enables plan sponsors to drive attention to areas of plan operation in need of scrutiny, as well as to secure appropriate expert assistance as needed. Retirement industry experts suggest for example that it can be helpful to secure outside expertise to conduct an operational review, noting that the scope and depth of a review can be tailored according to the concerns of the plan sponsor. Because compliance mistakes are always a possibility, another prudent practice for retirement plan sponsors is obtaining fiduciary liability insurance.
Indeed, Fiduciary Liability Insurance is the only way plan sponsors can protect themselves and Colonial’s affordable coverage provides defense costs and penalty limits up to $1,000,000 if you face allegations over an error in plan administration.
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Examples of Errors
Of course plan sponsors do not set out to have the plan operate differently then what is specified in the plan document, but in reality, it is quite common for day to day practices to be at odds with the protocols laid out in the plan document:
Brakefield says staff members of the employer who are working on the plan may read the plan document but not fully understand it, or take action without reviewing it, assuming they know what it says. Common ways this disconnect surfaces include not knowing what documentation is required for a participant to get a plan loan and misunderstanding rules for employee participation eligibility….Another key during a review is to look closely at how the plan sponsor’s staff works with the plan’s record-keeper, Brakefield says. Inadequate communications can result, for instance, in problems related to: employees’ deferral-election changes; employees opting out of automatic enrollment; and failure to stop a participant’s deferrals for the year once the individual reaches the annual contribution limit.
Perhaps not surprisingly, many employers make compliance errors related to the money going in and out of the plan, so reviewing the related operational protocols is a very wise practice. Eric Droblyen, president and CEO of Employee Fiduciary in Alabama observes: “Where people tend to screw up is in approving distributions….” For example, someone working on the plan at the employer may be unfamiliar with what the plan document says about the rules for hardship withdrawal qualification. Most plans—but not all…—use the IRS safe harbor plan definition, which limits qualification to a few situations such as payment of medical expenses.
More To Worry About
Implementation of the comprehensive new Secure 2.0 legislation over the next several years brings new compliance responsibilities for retirement plan sponsors. While there are many incentives for both businesses and workers to be excited about in Secure 2.0,
plan sponsors will need to be ever more attentive to detail. Some of the new provisions became effective at the start of 2023, while have compliance deadlines in 2024 and 2025. Richard Clarke, a national risk management expert points out:
Realistically, even with diligent effort, plan sponsors will make mistakes. 2022 was the second most active year on record for ERISA litigation against plan sponsors….Unfortunately, plan sponsors bear personal exposure for third-party claims of not meeting fiduciary obligations…Some plan sponsors think if they outsource administration, oversight, or supervision of employee benefit plans, that they’re also outsourcing the liability. The liability exposure in that instance is the decision that’s made to utilize third party services. Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits.
It is important for plan sponsors to remember that although contracts with service providers can reduce the risk of personal liability for a breach, this risk can never be fully eliminated. Keep in mind too that the DOL required ERISA fidelity bonds do not provide protection for unintended acts—only fiduciary liability insurance does.
Colonial’s reasonably priced and easy to obtain Fiduciary+Cyber coverage package, ensures sponsors and their businesses are protected with defense costs and penalty limits up to $1,000,000, if faced with claims of alleged or actual fiduciary breaches of duty in connection with the employee retirement plan. The Cyber Liability coverage is even included at no extra cost. Get protected, in minutes now:
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