Best practices related to company sponsored retirement plan documents include carefully saving all plan documents for the life of the plan, adhering to the terms described in the plan documents, and keeping records that exemplify decision making processes and sign-offs in accordance with the plan documents.
Life of The Plan: Best Practices
As retirement plan expert Steff Chalk observes, many plan sponsors follow a “7 year” rule of thumb for maintaining plan documents, though it would actually be wisest to exert care over the documents for the life of the plan. The National Association of Plan Advisors shares his related best practice guidance: “A best practice is to maintain plan records for the life of the plan and beyond. The major problem with failing to produce a fully dated and executed amendment/restatement is that the IRS treats the plan sponsor as if the amendment/restatement had never been executed.”
Of course the fiduciary responsibilities of plan sponsors don’t stop with maintaining the documents: plan sponsors must also ensure that the plan is actually functioning in accordance with the plan documents on record. For example, when enrollment materials are prepared for participants, who approves them? How about adjustments to the employer’s discretionary contribution? The reality is that authorizations made by doing whatever seems expedient on a busy day at the office may not be appropriate: plan documents lay out the protocols for the numerous decisions made about the plan on a routine basis. To ensure your plan is operating according to the plan documents, legal experts advise that it’s best practice for plan fiduciaries to periodically conduct a “401(k) Compliance Check.” As JD Supra explains: “If you read through your formal 401(k) plan document, you’d probably be shocked at the number 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.”
Failure to align to the protocols in the plan document is among the many risk exposures plan sponsors take on with employer sponsored retirement plans. Why go it along? Let the national experts at Colonial Surety help you mitigate the risks with affordable fiduciary liability insurance. Our annual premiums are less than you’ll spend for just one hour with an ERISA lawyer if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, Fiduciary Liability Insurance covers defense costs and penalty limits up to $1,000,000 in the event of a lawsuit. Uniquely, Colonial locks in multi-year rates, offers installation payments—and even includes $50,000 of Cyber Liability Insurance as a value add.
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Disconnects Are Common
An important best practice for retirement plan fiduciaries is studying the plan document for a clear understanding of who is supposed to be deciding what. Then, as Foley & Lardner recommend:
Identify who is actually making those decisions in practice and look for discrepancies between the two…It is quite common for there to be a disconnect, often because you cannot locate the “paper trail” to demonstrate proper delegations of authority—your plan says X makes the decision, while in reality Y is making that decision, and you cannot find anything in writing from X delegating that authority to Y. …If you find yourself in that common situation where you have a disconnect between your documents and what is happening in practice, it’s fixable in one of two ways—change your decision-making practices to match your documents, or change your documents to match your decision-making practices.
Of course there are many mistakes common to retirement plan sponsorship: studying up on the most frequently made errors—and how to correct—can also be a helpful risk prevention strategy. Toward that end, the 401(k) Plan Fix-It Guide from the IRS is a useful resource. Continuous protection at locked in rates from a leading national provider is another smart risk management action plan sponsors can take—and it can be accomplished in minutes, with Colonial Surety. Just select an affordable, package and receive our unique three point coverage solution for plan sponsors:
- The ERISA bond required to protect the assets of the retirement plan from theft.
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- Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.
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