A lack of compliance in your company’s retirement plan is easy to prevent with the right amount of planning. Plus, once you get everything set up with the right structure, it’s not time consuming or burdensome. The key is being proactive upfront, before you face unexpected pitfalls.
This isn’t a responsibility you can avoid, either. Even if you bring in others to help bear the burden — hire a co-fiduciary and co-trustee, usually an investment adviser, Employee Retirement Income Security Act (ERISA) attorney or CPA — a plan sponsor never fully gives up the fiduciary role, and the risks that come with that.
“If you feel overwhelmed or are unsure of where to find help, especially when you’re also dealing with other rules and regulations that are being put upon your organization, you’re not alone,” says Kimberly Flett, managing director of Compensation and Benefits at BDO USA, LLP. “Some employers get frustrated, saying, ‘This is too much work, too much cost to worry about, I just won’t have a retirement plan.’”
But there are ways to set up a structure to run the plan successfully.
Smart Business spoke with Flett about how to minimize your retirement plan risks.
What risks are associated with not properly managing your retirement plan?
The No. 1 risk is a lack of education. Your employees aren’t sure what to do, so the management is hit and miss and your organization makes knee jerk reactions to changes. This can lead to operational and compliance errors, where the plan doesn’t follow its plan documents and related requirements. You might miss enrollments. If there’s disconnect between your payroll company and your staff, you may not be withholding the right amounts or fulfilling a participant’s requests for deferral election changes in a timely manner. You may also be at risk for distribution errors.
If these pitfalls occur, you and your company run the risk that the plan will be funded incorrectly and distributions will be missed. This can trigger an audit and draw penalties from the IRS and the Department of Labor (DOL). You run the risk of losing your tax-qualified status. You run the risk of an employee suing because he or she feels the plan has been mismanaged. You run the risk of employee fraud.
What’s the best way to oversee a plan?
The employers that are the most successful at managing their retirement plans have identified the right internal team to monitor the plan. That team may include the CFO, the benefits coordinator and HR director, acting like a board of directors for your plan. Generally referred to as the 401(k) committee, this group should meet at least annually or semiannually and follow a timeline for the year’s tasks.
That committee then works in conjunction with an outside group, which might consist of your third-party administrator, ERISA attorney, CPA and investment adviser. These advisers can assist with plan operations, such as compliance and regulatory changes — basically telling you what you don’t know.
It comes down to planning, review, communication and education.
One way to improve employee education and communication is holding an annual town hall for the employees, where you explain what management is doing to administer the retirement plan and outside advisers are on hand to answer questions.
How do you foresee the new DOL fiduciary rule playing a part in 2017?
This DOL rule provides a higher legal standard for investment advisers. Their recommended funds must be in the best interest of their clients, which may not have been the case in the past. This will make it easier for employers to make sure the plan helps employees invest wisely and prudently.
What else do employers need to know?
It’s critical to disclose the existence of all plans to all of your advisers — whether that’s a retirement plan, employee stock ownership plan, 403(b), simple plan, health and welfare plan or non-qualified plan — because these plans interact with each other.
In addition, don’t forget to consider benefit plans when your company goes through a merger, acquisition, sale, shutdown or ownership structure change or redesign. The whole structure can be impacted if, for example, a new owner owns other companies. These changes must be looked at on a broad scope by experts.
Insights Accounting & Consulting is brought to you by BDO USA, LLP