A fundamental responsibility of retirement plan sponsors is establishing, adhering to and periodically updating the plan document, which essentially functions as a master guide to ensuring the plan is operating correctly. Here are key pointers.
The Big Picture
Fisher Investments reminds us: “As an employer who sponsors a 401(k) plan, it’s ultimately your responsibility to develop a plan document, establish the investment lineup, and work with your chosen service providers for the purposes of ongoing administration and employee communication.” In many ways, successfully fulfilling the ERISA obligations associated with plan sponsorship tie back to the plan document, which serves as “the master guide for how the plan works, and it’s important because it’s the final word for making sure a plan is operating correctly.” A solid plan document should detail:
- Eligibility: When does an employee become eligible to participate in the company plan?
- Employer Contributions: Will the company offer matching contributions to employees? If so, at what rate?
- Fees: The plan document will also determine how fees are paid. Will the fees be paid only by the employees participating in the plan, or will the company cover some costs?
- Loans: Some 401(k) plans allow employees to take out loans against their savings. Will your plan allow for this? If so, what are the terms when it comes to repayment schedules and interest?
- Additional Plan Features: There are many features that can be added to a standard 401(k) plan to customize it, like profit sharing provisions. What custom plan features will you include in your plan?
Of course it’s not enough to have a clearly articulated plan document that is up to date on all the options offered and in compliance with emergent regulations. The actual operations of the plan must sync with the plan documents: oversights in this regard are frequently problematic for plan sponsors. Related to the plan document, best practices for plan sponsors include conducting periodic compliance reviews, adhering to the terms described in the plan documents, and keeping records that exemplify how decision making processes and sign-offs are conducted in accordance with what is specified in the plan document. As the legal experts at JD Supra point out: “If you read through your formal 401(k) plan document, you’d probably be shocked at the number of times the plan requires someone to make a determination, authorization or approval under the plan. Each one of those instances is a potential ground for a lawsuit or audit inquiry if the person who is authorized under the plan to make that decision is not, in fact, the person who is actually making that decision.”
Errors related to the plan document are among the many risk exposures plan sponsors take on with employer sponsored retirement plans. Experts remind us, as fiduciaries, we “can be held personally liable for damages, even decades into the future.” While this is a harsh reality, we don’t have to carry the risk alone. Colonial Surety helps plan sponsors across the country mitigate their risks with affordable fiduciary liability insurance. For a few dollars a day, plan sponsors can be covered in the event of claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial’s fiduciary liability insurance includes defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Why carry all the risks alone? Protect yourself and your business now:
Time for Improvement?
While of course the mandatory provisions and timelines detailed in the SECURE 2.0 Act require attention, experts encourage employers not to overlook the options SECURE 2.0 also provides for plan improvement. Noting that of course changes to the plan should be made only after careful evaluation, with decisions recorded and adjustments ultimately reflected in the plan document, Plan Sponsor offers this summary of beneficial optional provisions included in SECURE 2.0, which can be implemented beginning next year:
- Self-certification for emergency saving withdrawals of up to $1,000 per year and for domestic abuse withdrawals (penalty-free);
- Employer contributions to a retirement account matching employee student loan payments;
- After separation, employers can roll over participant balances of $1,000 to $7,000 into an Individual Retirement Accounts;
- Introduction of automatic portability of accounts; and
- Automatic deposits into an emergency savings account, up to 3% of salary for a total contribution of $2,500.
As you think about improvements to the company retirement plan, remember to upgrade your protection plan too. Don’t find yourself facing even the allegation of a fiduciary breach alone: a defense attorney with ERISA expertise costs about $600—-per hour. Obtain protection from Colonial, where a whole year of Fiduciary Liability coverage is less than what you’d pay for one hour with that lawyer if a crisis hits. Plus, we even include Cyber Liability coverage to protect your business and retirement plan in the event of a cyber breach. Afterall, cyber breaches can escalate into fiduciary breaches too. Obtain efficient and effective coverage for yourself in minutes today:
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Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.