Common Fiduciary Errors
An ounce of prevention is worth a pound of cure. This universal saying couldn’t be more true when it comes to fiduciary responsibility. Yet, fiduciary errors abound, and most of them are unintentional or even well meaning. Let’s take a look at some common missteps related to managing a company retirement plan.
Following Plan Documents and Communicating Changes
Possibly the most frequent source of fiduciary breach, interpretation of plan provisions is not always intuitive. The remittance of participant deferrals “as soon as administratively possible” means as soon as possible, not as soon as convenient. A common response when a plan administrator is asked how they determined applicability of a specific plan provision (e.g., eligibility for employer match) is, “The prior administrator told me how to do it.” This response does not instill confidence that it is being handled correctly. Many administrative errors go on for years, and every year not corrected is another fiduciary breach. The management of plan forfeitures (non-vested assets left in plan by a terminated participant) can be especially troublesome. The rule is to allocate these assets annually at year end. This can be a costly and administratively cumbersome correction, but all too often it’s not accomplished annually which violates the rule forbidding plan unallocated assets.
The definition of compensation in the plan document may not be the same definition used by your payroll department/service. Furthermore, many plans and employers have different naming conventions for the various money types: deferrals, employer match, bonuses, pre-tax health insurance premiums, FBA plan, commissions and tips, or fees for professional services. When plan documents are changed or updated, compensation administration needs to follow. It is a good idea to check this periodically to ensure consistency.
Participant loans are another area that can cause issues, especially if more than one loan is allowed at a time or loan payback is allowed to continue post termination.
Often, plan operations do not match up with the plan terms in plan documents, the summary plan description, loan procedures, and an Investment Policy Statement (IPS).
Changes in the plan should be communicated to plan participants. A summary of material modifications should be given to plan participants within 210 days after the end of the plan year in which the modifications were adopted.
Participant Eligibility
Plan documents should have a definition of employees (hours worked or elapsed time) and the requirement for eligibility and employer contributions. The manner in which hours are calculated, hiring dates, and compensation calculations could be problematic. ERISA does not recognize the term “part-time employee.” It strictly takes into consideration hours worked or elapsed time to determine eligibility for deferrals and employer match. In addition, the SECURE Act created additional requirements for long-term part-time employees’ eligibility.
ERISA Reporting and Recordkeeping
Employers are required by ERISA to maintain records relating to employee benefit plans. Record maintenance varies by type of document for both plan level and participant level records. Plans with 100 participants or more must file Form 5500 Annual Returns/Reports of Employee Benefit Plan and conduct an annual audit. Smaller plans, those with less than 100 participants, must file Form 5500-SF.
Investment Policy Statement
Maintaining and following an IPS is of utmost importance. There have been successful lawsuits where an employer acted in the best interest of participants, but the IPS had requirements that the fiduciaries failed to follow to the letter, and the result was costly to plan sponsors.
Understanding and Discharging ERISA Fiduciary Responsibilities
Many plan sponsors and fiduciaries are not fully aware of their roles/responsibilities. ERISA law pertaining to DC plans is quite complex and sometimes unintuitive and unclear (what does “procedural prudence” really mean?). Our Fiduciary Fitness Program is designed to gauge the fiduciary health of your plan, explain applicable fiduciary mitigation strategies, and remedy any fiduciary breaches. It is comprehensive and includes the ERISA required documentation.
Correcting ERISA Compliance Mistakes
When detected early by the plan, many ERISA compliance errors can be corrected through voluntary compliance programs to reduce the potential for fines and penalties. The Department of Labor has the Delinquent Filer Voluntary Compliance Program (DFVCP) and the Voluntary Fiduciary Correction Program (VFCP). Plan administrators can file delinquent annual reports through the DFVCP, and the VFCP allows fiduciaries to take corrective measures resulting from certain specified fiduciary violations for relief from enforcement actions. In addition, the Internal Revenue Service has both the Voluntary Compliance Program (VCP) and Self Correction Program (SCP) in its Employee Plans Compliance Resolution System (EPCRS) which allow plan sponsors and other plan fiduciaries to correct failures in the plan’s operational compliance prior to being discovered by the IRS.
Avoiding fiduciary breaches is the best path. When they do happen, financial professionals can often detect them before they manifest. Get in touch with us anytime to conduct an audit or review of best practices that can help your retirement plan.
Scott D. Michael
Financial Advisor