Offering a retirement plan comes with many rewards and challenges. The rewards are obvious. Employers and employees win when a retirement plan is part of a corporate benefits program. Cue the challenges: plan administration and asset management. These duties come with very specific fiduciary responsibilities, starting with an understanding of the rules and standards of conduct under the Employee Retirement Income Security Act (ERISA).
Let’s examine 5 common fiduciary ptifalls, the consequences attached, and what to do when the challenges seem to outweigh the rewards. The solution is simpler than you may think.
1. Ignoring conflicts of interest
ERISA states that fiduciaries must act in the interests of the retirement plan participants and their beneficiaries at all times. However, loopholes in the retirement advice rules have allowed advisors and brokers to put the potential for their own profits ahead of their clients’ best interests. Because plan sponsors are ultimately responsible for the fiduciary obligations associated with the plan, they must exercise care in selecting specialized vendors to perform management of plan operations and plan assets.
2. Failing to follow the terms of the plan document
Plan sponsors must operate the plan according to the terms of the plan document to ensure tax-qualified status and prevent a breach of fiduciary responsibility. It is the plan sponsor’s duty to keep the plan in compliance with tax laws. Furthermore, any changes made to the plan document will affect various vendors servicing the plan. Failure to follow the plan’s terms and to communicate any plan changes to the appropriate vendors could lead to mistakes that are costly to correct.
3. Making untimely deposits of contributions
Plan sponsors are required to remit employee and employer contributions to the plan in a timely manner – and correct any late deposits. Untimely remittance leads to time-consuming corrective paperwork, from determining the amount of earnings due on late deposits, to correcting late deposits of participant contributions, to paying excise taxes, to completing a sea of tax forms.
4. Communicating with participants in an untimely manner
Plan sponsors must distribute participant disclosures and notifications in a timely manner and ensure that these notices provide all legally required information. Failure to do so could result in significant consequences. For example, forgetting to issue an annual notice could lead to loss of plan status and limiting (or refunding) contributions made by highly compensated employees (HCEs). Add a layer of complexity to the mix with the challenge of getting employees to participate – and improving participant outcomes – and communication is vital to the plan’s success.
5. Completing the employee census incorrectly
Errors in an employer’s annual census are common but come with serious consequences. Just a few of these errors include:
- Date of birth – could affect nondiscrimination testing, resulting in costly corrections due to contribution errors
- Compensation – could affect employer contribution calculations, compliance testing, and HCE status if the wrong definition of contribution is used
- Deferrals – could result in an incorrect ADP test, tax consequences, and a number of other issues if the deferral amount is applied incorrectly
- Stock ownership – could affect nondiscrimination testing, as percentage of stock owned is used to determine key employee and HCE status
How to avoid these (and other) fiduciary pitfalls
According to ERISA, liability is personal. While a plan sponsor can manage the operations of their retirement plan, the question is…why place these administrative burdens on themselves and their staff? It is most likely in a plan sponsor’s best interest to select and oversee a professional fiduciary who can focus on running their plan so they can focus on running their business.