Investment offerings. The 401(k) plan sponsor is responsible for the fund lineup, or how the offerings compare to benchmarks. Do the investment choices get rearranged when laggards are discovered? How were the funds chosen? What are the default options? Are the offerings diverse?
Highly compensated employees (HCE). This is defined as those who made more than $115,000 last year, those who own more than 5 percent of the business or, under rules of attribution, spouses and lineal descendants and ascendants of HCEs. Many believe there are limitations on how much HCEs can defer. Ever hear, “I don’t understand why I send contributions to my 401(k) plan and they keep sending it back?” The plan’s design is likely a cookie-cutter not set up to enable the HCEs to maximize the tax benefits available.
Eligible employees. The plan’s document defines who’s eligible. If your plan does not offer automatic enrollment, make sure you retain evidence of all employee notifications of eligibility to enroll.
Notices. Every participant must receive a Summary Plan Description (SPD) when entering the plan. This is a “plain English” explanation of the plan. Annually thereafter, a Summary Annual Report (SAR) is necessary.
EIN (tax identification number). Every plan is a trust, a tax-exempt trust. It’s also a separate legal entity. Do you have a separate EIN for the plan? We find frequently that sponsors using bundled plans have not obtained this EIN, and that is a mistake. Think about it: When a participant leaves a plan, he’s provided with a 1099-R. The payor’s EIN must be shown on the form, and the payor is the plan. This is but one example.
Documentation. The sponsor has the duty to show it acted reasonably and prudently on behalf of the plan participants. Therefore, document it. Examples of things to document:
- How and when plan investment choices were reviewed and compared to the benchmarks
- How and when laggards were removed and replaced with similar funds with better track records
- How fees of investment choices were reviewed and date of review
- How investment choices were in fact chosen, what criterion and what measure was used
Plan contributions. Plans with less than 100 participants must have salary deferrals transferred to the plan no later than the seventh day following the day of withholding. The plan must have a fiduciary responsible for ensuring monies are successfully transferred.
Not only should your 401(k) plan be reviewed for disclosure and fiduciary compliance under new regulations, you should revisit its design and structure to ensure its benefits are being maximized for all parties involved.
Note: This discussion is not intended as tax advice. The determination of how the tax laws affect a taxpayer is dependent on the taxpayer’s particular situation. A taxpayer may be affected by exceptions to the general rules and other laws not discussed here. Taxpayers are encouraged to seek help from a competent tax professional for advice about the proper application of the laws to his situation.
William H. Black Jr. has been in the pension-administration business for 34 years. His firm, Pension Services Inc., administers defined contribution and benefit plans and employs an ERISA attorney, an enrolled actuary and a complete clerical staff. He is a speaker and author for several industry journals\ and has appeared on financial radio shows to discuss retirement and financial matters. To reach him, e-mail firstname.lastname@example.org .