Over the past 15 years, there has been a
significant transition in qualified
retirement programs. In the ’70s through the mid-’90s, most retirement benefits were born by contribution of the
employers. When the employers were footing the bill, they were very involved with
investments, the administration and the
operation of the plans.
Smart Business talked to Y. Stephen
Liedman, area president at Gallagher
Liedman, about how to best manage your
How has the employers’ involvement changed?
Due to high costs of funding, many
employers disbanded the employer-funded
retirement plans and installed 401(k) plans,
which put the majority of the funding on
the employee. Many employers feel they
are just making a plan available for their
employee deferrals and, in most cases, are
providing a match. This match is usually
much less than their prior obligation.
Today’s employers think that because the
employee is contributing the majority of
the money and also making investment
decisions, that their responsibility is minimal. This perception is erroneous and can
be very costly to the employer.
What impact has this shift in plan structure
As a qualified retirement plan practitioner
for close to 35 years, I have seen most everything that can cause employers significant
legal liability, IRS penalties and personal
fiduciary liability. Over the past 18 years
dealing in 401(k) plans, I would estimate
that two-thirds of the plans we look at as
consultants are noncompliant in at least one
of the required areas. At least one-third are
significantly noncompliant. We see many
plans run by employers who are not knowledgeable in the requirements and who,
therefore, treat the plan as a stepsister.
What areas should employers be looking at?
The most important area is plan compliance and fiduciary responsibility. You, as
the employer, must make sure that the plan is being run based on your plan document,
not the summary plan description, which
only incorporates certain aspects of the
plan. Many employers mistakenly think the
summary plan description is the plan document. We have found that if the employer
has a strong plan consultant and a plan
administrator who oversees everything,
these inconsistencies can be caught.
Unfortunately, many plans are promoted
by traditional brokerage houses as turnkey,
and, thus, the appropriate attention to fiduciary compliance is being overlooked.
What can employers do to stay compliant?
One of the biggest problems is employers
who do not provide proper data for testing
and 5500 preparation. Full payroll data,
including employees who have been terminated, must be provided. Each year your
administrator asks a number of questions
regarding changes in your company, such
as large numbers of terminations, closing a
division, or acquisitions of new companies.
These questions must be answered accurately, or you may end up with a noncom-pliant plan. If you are buying another company, before you close you should contact
your consultant to make sure you are not
exposing your company and its plan to the acquired company’s liabilities for noncompliance. Retirement plans are governed by
specific rules and regulations provided by
both IRS and the Labor Department. All
calculations of contributions and benefits
must be governed by the definitions in your
plan document. Unfortunately, what seems
logical as to structure of a plan, on occasion, does not always agree with the law.
The law must be followed. A noncompliant
plan can be penalized or outright disqualified, or the employer can have significant
penalties imposed. All too often, employers
are unaware that the law places the
responsibility of compliance on them and
not the vendor or sales consultant who
installed the plan.
What does senior management need to ask
As the employer, what are my fiduciary
responsibilities to my employees? The
employer is a fiduciary and, in certain
investment and education areas, the CEO
and/or the CFO could have personal exposure. Based upon the new Pension
Protection Act, the employer must communicate clearly and concisely to the
employees when educating them as to how
the plan works and what investments are
available. Employees who are not given
proper information can hold the employer
responsible for losses in investments or
improper investment lineup.
In order to have certain fiduciary protection,
what needs to be done?
All plans should meet the criteria under
404(c) of the Labor Regulations. One of the
more important criterions is that the plan
should have an Investment Policy
Statement. Additionally, employers should
establish an investment committee to oversee that they are strictly adhering to the
Investment Policy Statement. The
Department of Labor is utilizing the ‘prudent
expert’ rule, which is a standard that most
employers are falling well short of when
reviewing their 401(k) plan investments.
Y. STEPHEN LIEDMAN is area president at Gallagher Liedman.
Reach him at (305) 639-3105 or [email protected].