Filed under: Retirement Plan Audits
By Shawn Hansen, CPA
Implementing a retirement plan can be one of the most rewarding decisions your organization can make. Not only do they help employers attract and retain talent but also provide a saving vehicle for its employees as they build for their future. Once a retirement plan is established, Federal law in the Employee Retirement Income Security Act of 1974 (ERISA) sets rules and guidelines that employers must follow (ERISA does not cover Federal, State and local government plans or plans sponsored by churches). Plan sponsors are required to name a person or group responsible for managing the plan. In addition, although not specifically named, there will likely be other individuals or groups exercising control over the plan and its assets. Collectively, these individuals or groups are known as fiduciaries.
ERISA requires fiduciaries to act in the best interest of participants and make sure plans are operating according to the rules and terms listed in the plan documents. Fiduciaries should also implement the appropriate processes to keep plans in good working order and in compliance with applicable laws and regulations. In addition to these general duties, I would like to highlight other responsibilities and monitoring activities that fiduciaries and other plan officials should consider.
Retirement Plan Responsibilities
1. Investments
The plan should offer an appropriate “menu” of options for participants to invest their money. Having a mix of investments with varying objectives and risks will allow participants to diversify their savings and help minimize the risk of large investment losses. There should also be a process in place to monitor the plan’s investment returns on a periodic basis (at least annually). A written Investment Policy can be a useful tool for outlining procedures to select and monitor investments and help fiduciaries limit their legal liability. Many organizations hire an investment consultant to help draft an Investment Policy and to assist with the selection and monitoring of the plan’s investments.
2. Fees and Expenses
Fiduciaries are required to monitor investment management fees and administrative expenses paid by the plan to verify that they are appropriate and reasonable. Fiduciaries should first determine which expenses, if any, the plan is permitted to pay based on the terms of the plan documents. Second, even if expenses are allowed to be paid from plan assets, plans shouldn’t pay expenses that benefit employers or costs that you would expect employers to pay in the normal course of business, also known as “settlor” expenses (e.g. costs to establish the plan, plan design fees, costs to analyze plan amendment options and costs to terminate the plan). Lastly, plan expenses must be reasonable in amount when taking into consideration the level and quality of the services provided. The Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) has published a guide titled “Understanding Retirement Plan Fees and Expenses.” The guide describes the various types of plan related expenses and offers an approach to evaluate expenses.
3. Service Providers
When hiring service providers for the plan, fiduciaries should be documenting their process and factors that went into making their decision. The purpose of documenting these steps is to help demonstrate that the decision makers had well thought-out plan and acted with care during the hiring process. Once hired, fiduciaries will need to periodically review the service provider’s performance and verify that they are complying with the terms of their service agreement. In addition, fiduciaries will want to review the quality of the deliverables and services provided and follow up on any complaints received from the sponsor’s personnel or participants.
4. Participant Contributions
Organizations may be unaware of the strict regulations concerning timely remittances of employees’ contributions to the plan. DOL Regulation 2510.3-12 indicates that employee contributions should be sent to the plan on the earliest date those amounts can be reasonably segregated from the employer’s general assets. For the majority of organizations, this means that employee contributions should be sent to the plan within a few days of the pay date. Fiduciaries should be reviewing their organization’s remittance procedures and verify that contributions are being sent into the plan within the allowable timeframe.
5. “Check-Ups”
The IRS has developed a voluntary “check-up” process to help fiduciaries and plan officials ensure that their plans are following some basic rules for operating a plan. Check-ups include a short checklist of questions related to the plan’s operations. Checklists have been designed according to the type of plan you sponsor (e.g. 401(k), 403(b)). Get started on your plan check-up by going to the IRS site.
EBSA has produced a short publication titled “Meeting Your Fiduciary Responsibility” which expands on some of the topics discussed above as well as addressing other important issues and questions that fiduciaries should consider.
© Clark Nuber PS, 2013. All Rights Reserved
