Employers have a sacred, fiduciary duty to treat benefit plans as if they were their own nest eggs. Therefore, such plans are heavily governed by the Department of Labor with numerous expectations, communication needs and filing rules.
“The dilemma today is that so many plans are underfunded,” says Bertha Minnihan, national leader, Employee Benefit Plan Services, at Moss Adams. “People have worked hard for their retirement, and if a sponsor should screw that up, they have nothing to fall back on.”
An aging population that needs its money to go further compounds the problem. When benefits aren’t administered properly, society struggles to care for the older generation, she says, and the younger generation suffers when older workers stay on the job longer.
Smart Business spoke with Minnihan about how to properly administer your benefit plan to help employees and how to avoid common regulation pitfalls.
What is the typical reporting structure for employee benefit plans?
There are several disclosures and reporting that are required to go to the participants, as they are the first consideration, and all entities are working to ensure that plans are administered properly for them. Additionally, plans must file a tax return annually to the DOL and the IRS, and those meeting additional requirements must be externally audited, as well. The Pension Benefit Guarantee Corp. also monitors benefit plans that have gone defunct or become underfunded by a certain percentage. The system is quite complex.
Who are the service providers in this space?
Internally, there may be the company sponsoring the plan and a committee delegated to oversee the day-to-day operations, as well as HR and payroll. Externally, benefit plans have investment custodians holding the funds and investing them at the participants’ direction and record keepers tracking plan activity. Record keepers can be a separate entity, or they can be an arm of the investment custodian. Other players include auditors, plan attorneys, actuaries for defined benefit plans, investment advisers and trustees.
What DOL hot button areas do sponsors need to consider when administering benefit plans?
One of the more common pitfalls is the timeliness of deposits into the trust. The DOL wants employee deferrals put into participant accounts quickly because employees deserve to start earning. It’s problematic when companies are careless or feel payroll taxes and other items are more important so they withhold withholdings and play cash flow games.
Compensation is another challenging area, especially when different types of bonuses are paid. The DOL’s hot button is whether the deferrals are being calculated on the correct costs and whether the right components are eligible. If you are missing income components and deferrals are understated, your company could be offering an understated match.
Then, if the employee is shorted, the employer has to make up the entire shortfall, which often surprises people. Some Fortune 500 and 1,000 companies in Silicon Valley have miscalculated compensation and now owe their plans millions of dollars from deferrals, earnings and unfunded matches.
The DOL is also very concerned with educating employees, whatever their demographic. As a business owner, you need to make an effort to get your employees to participate and to maximize their retirement savings.
What are some best practices for plan administrators?
Here are some best practices that could help mitigate risks, concerns and challenges.
- Appoint an oversight governing committee. If your board does not delegate, it is automatically the fiduciary, and the board is often not up to speed on the plan, HR, payroll and/or the Employee Retirement Income Securities Act (ERISA), the law governing benefit plans. Additionally, in private companies, a third-party trustee who is an internal officer is also at fiduciary risk, and a class-action suit could be brought against both the board and the trustee at a risk of personal liability.
- Have your oversight committee be timely with sending funds to the trust.
- Review your census data regularly and ensure databases are accurate. Changes, such as a termination date, reporting someone’s death or a wrong age need to be communicated to different departments.
- Ensure your personnel understand how the plan works. For example, if you hire a new payroll person, make sure that he or she has read and understood the summary plan description.
- Benchmark your fees and look at them regularly. With new federal disclosures, there is transparency by law, so pay attention and ask questions.
How should merger and acquisition groups approach benefit plans?
Whenever companies — small or large — fold or change ownership, a number of items can be missed, so keep this in the back of your mind as you go through the process. Have an ERISA expert advise you early on, as this is not just a matter of merging benefits. The acquired company could have a 401(k) plan that needs to be terminated, a defined benefit plan that is unfunded and frozen, or a deficient benefit plan that must be cleaned up before it can taint your plan on contact. M&A committees should have checklists to ensure employees do not lose their benefits and that the company is still protected and reporting in a timely manner.
How are governing entities dealing with work force globalization in this area?
Globalization is affecting benefits plans without businesses realizing they are possibly being sloppy. If you have U.S. employees working abroad or foreigners coming to your company to work, you need to consider how this will affect benefits. How is your plan written? Are employees still accruing benefits in a timely manner? What does your plan include or exclude, and is that what you intended to do? There is a lot of interest on the subject, and the IRS is working with other governments to ensure that documents are in order, that they understand what the U.S. is doing and that they know what to tell their citizens who come here.
Bertha Minnihan is the national leader, Employee Benefit Plan Services, at Moss Adams. Reach her at (408) 916-0585 or [email protected]
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