When you sponsor a retirement plan, like a 401k, the plan document is your play book, and you should be consulting it whenever questions pop up. For example, do you match catch-up contributions? Exactly which employees are eligible and when? What are the distribution procedures? Though fundamental, one of the most common (and dangerous) errors plan sponsors make, is failing to adhere to the plan document. Read on for pointers from pension professionals.
Clarity and Compliance
The purpose of a retirement plan document is to ensure clarity and compliance about how the retirement plan is managed. Watkins Ross share these fundamentals about plan documents:
- A plan document is a legally binding agreement that outlines how a retirement plan is operated and administered … .A plan document’s number one purpose is to ensure compliance with…the Employee Retirement Income Security Act (ERISA), which sets the legal standards for retirement plans…..
- A well-drafted plan document provides clarity about the plan’s structure and rules. It outlines eligibility criteria, contribution limits, investment options, and distribution procedures….This consistency fosters trust among participants, who know the plan’s rules are being applied fairly.
- Plan Documents outline the procedures for making amendments to the retirement plan …due to changes in laws, regulations, or organizational goals. The plan document ensures that any changes are properly documented and compliant….
- A plan document is also often the first thing requested during a Department of Labor or IRS audit. It serves as formal proof that the retirement plan is designed and operated according to legal requirements.
As important as it is to have a well-written, thorough, and updated plan document, having the best one ever is of no use to retirement plan sponsors, unless they are in the habit of frequently consulting it. Referencing the plan document is the best (and really only) way plan sponsors can ensure that they are actually administering the plan in accordance with the protocols detailed in the plan document. Failing to follow the plan document can not only cause confusion and errors, but can lead to fiduciary breach allegations, as well as regulatory scrutiny.
Most plan sponsors, upon reflection, will probably realize that the plan document does in fact provide answers to the kinds of questions that frequently pop up, and may seem more perplexing than they actually are. Recently, for example, Plan Sponsors’ “ask the experts” column featured the question: “Can an Employer Match Catch-Up Contributions?” In reply, Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, directed attention to the importance of consulting the plan document:
As with many plan-provision questions, the answer depends on what your plan document says! Matching catch-up contributions is not required, so there should be a section of your plan document or adoption agreement that specifically addresses whether or not catch-up contributions are matched under the plan….Depending on your plan design, whether or not you match catch-up contributions may be a moot point, as employees in many plans are able to max out their matching contributions without making catch-up contributions…For example, if I make $100,000; my plan matches 100% of the first 5% of employee elective deferrals; and I defer the full 2025 402(g) limit of $23,500 to my plan account, I will have deferred far more than the 5% of pay necessary to already receive the maximum matching contribution.
As this example points out, it’s vital for plan sponsors, and others with responsibilities to the retirement plan, to frequently check their actions against the protocols spelled out in the plan document. Watkins Ross encourages special attention to alignment with the plan document related to:
- Eligibility requirements
- Contributions
- Definition of compensation
- Distribution options
Good To Know and Do: Forfeitures?
Given the recent wave of ERISA litigation related to the use of forfeitures, plan sponsors need to be absolutely clear on what the plan document says about forfeitures (aka the employer contributions left behind when an employee leaves before becoming fully vested), and may even need to consider updates. Attorneys at Winston & Strawn offer this advice for limiting risk exposure related to the use of forfeitures:
The first step to mitigating risk is understanding whether the plan documents contain discretionary language permitting the use of forfeitures for plan expenses or future employer contributions. If so, consider:
- Narrowing the acceptable uses of the plan’s forfeiture account to one category of expenses (g., employer contributions only or plan expenses paid by the employer only), or
- Identifying one category of expenses to always be paid first.
- If the employer determines that it is comfortable losing flexibility in utilizing funds as they see fit, non-discretionary language can be added through a plan amendment, so that there would no longer be a choice for the fiduciary to make, which decreases liability…..
- If a pre-approved plan includes non-tailorable discretionary language, the employer may be stuck or risk loss of protection of the pre-approved plan design.
- An alternative solution could be adopting a separate policy selecting non-discretionary uses of forfeitures that fit within the existing pre-approved plan terms.
Is Fiduciary Liability Insurance Necessary?
Yes, given their ERISA fiduciary role, obtaining fiduciary liability insurance is essential for retirement plan sponsors. Unforeseen challenges arise all the time, and seemingly small oversights trigger costly regulatory action and litigation. Though required for the protection of the retirement plan, ERISA Bonds do not protect plan sponsors. 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 Surety Company, 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. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000, if faced with alleged or actual breaches of duty in connection with the employee retirement plan
Plus, Cyber Liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services.
Obtain efficient and effective coverage for yourself, your company, and the plan, in minutes today:
Protection for Retirement Plan Sponsors
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.