401(k) responsibilities

Plan sponsors are accountable for more than most realize

Sponsoring a 401(k) plan can bring tremendous value to your organization. Having a great benefit plan can boost the morale of your team members and improve your ability to attract and retain top talent. Managing your 401(k) plan, however, can get more complicated. In fact, many companies are failing to meet their basic responsibilities as a plan sponsor. Whether you sponsor a large or small plan, your fiduciary responsibilities are the same. Both the Department of Labor (DOL) and IRS conduct examinations of 401(k) plan sponsors, so it’s critical to understand and meet your responsibilities.

We spoke with Suki Mann, senior manager at Sensiba San Filippo LLP, to learn more about the responsibilities of 401(k) sponsors.

What is the biggest misconception of 401(k) plan sponsors?
Many plan sponsors are overly reliant on third-party service providers, assuming that because they are paying someone else to manage their plan that all of their responsibilities have been met. In reality, 401(k) sponsors frequently fail to meet their basic fiduciary responsibilities, and in doing so, fail to look out for the best interests of their employees and their organization. Failing to meet requirements can lead to larger investigations from the IRS and the DOL as well as more money coming out of your pocket book.

What are the fiduciary responsibilities of plan sponsors?
As a plan sponsor, you are responsible for managing the assets of your employees. Both the IRS and the DOL have published requirements pertaining to the fiduciary responsibilities of plan sponsors.

Commonly overlooked requirements include holding plan management meetings at least once per year to review the performance of the plan, quarterly statement reviews to look for any inconsistencies that could indicate fraud, and reviewing fees charged to both the plan and plan participants to ensure that they are reasonable. Your third-party provider can also help you understand your responsibilities. Just remember that hiring a third-party plan provider alone doesn’t ensure that you are meeting your responsibilities; in fact, reviewing their work is part of your fiduciary responsibility.

What are some of the common pitfalls found during DOL and IRS examinations?
Government examinations are not the best time to find out about problems with your plan. Understanding what problems are typically found during examination can help plan sponsors find and correct problems before they are revealed under examination. Many sponsors fail to meet document retention requirements, mistakenly assuming that their third-party plan provider is keeping all documents. When participants take hardship distribution or borrow money from the plan, these activities must be documented and records should be retained.

It is also common for plans to fail to adequately define ‘salaries’ and ‘contributions,’ which leads to incorrect matching contributions that can create liability and interest for the plan sponsor. Many smaller plans have nondiscrimination issues, where plan contributions are unfairly top heavy. Other plans have problems omitting eligible employees. It is critical that management notifies employees when they become eligible, and follow up on participation.

How can sponsors correct previous mistakes and become compliant?
The DOL voluntary fiduciary correction program generally provides plan sponsors with the opportunity to self-report and correct problems before fines are assessed. Both the IRS and DOL are generally much more lenient regarding self-reported corrections as opposed to problems found under examination.

Regardless of the size of your plan, you have a fiduciary duty as the plan sponsor. While larger plans require audits that often identify problems during the audit process, smaller plans also need to ensure that their fiduciary responsibilities have been met.

If you have questions regarding your fiduciary responsibility as a plan sponsor, visit the DOL or IRS website, or call a qualified advisor for a thorough review of your 401(k) plan.

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