Viewpoints

10 Things Employers Should Do With Their 401(k) Plans

Denise Gueli

Originally Published In:
October 2004
Author: Denise Gueli, CPA

A former CEO has traded his plush executive office for the dark confines of a prison cell. His best friend is Robbie the rat. His professional reputation is ruined. His country club revokes his membership.  His wife and children languish in poverty while he mourns his lost future. “How can a simply sponsoring a 401(k) plan lead to this?” he asks.  If only he had listened to his accountant and attorney! Sounds impossible? It’s not as far-fetched as you think. 

Retirement plans, including 401(k) plans, are the most common employee benefit provided by employers. Sponsoring a retirement plan is neither easy nor free from liability, for example, retirement plans are one of the few entities that are monitored by more than one governmental agency.

The Internal Revenue Service wants to make sure they’re not losing out on their fair share of taxes, especially when the employer gets a deduction for plan contributions, but the employee doesn’t currently pay income tax on those contributions. The Department of Labor protects “the little guy”, the employee, and ensures the plan is being administered in the best interest of the participants.  The complexity and risk associated with administering a pension plan is comparable to a publicly traded company.

The problem? Employers usually concentrate on how to properly run their company; however, the Department of Labor wants employers to also ensure that their pension plan is running properly. The DOL is very aware of the billions of dollars invested in the stock and bond markets for the future benefit of employees, and they hold employers responsible for overseeing these assets and the plans they are invested through. The Department of Labor has increased their audit activity over the past few years, and highly publicized cases have resulted in huge penalties and in some cases, prison terms.

Should you terminate your 401(k) plan today? Of course not. Retirement plans are an effective way to attract and retain quality employees, and chances are you have a large sum invested in the plan yourself. But how can you balance the risk and responsibility when you aren’t even sure of what you don’t know? How can you stay out of trouble?

1) Provide as much investment information to participants as you can. In this area, many participants are inadequately educated, and therefore unprepared to make sound decisions about their financial security.

2) Be aware of fees associated with administering the plan, and try to minimize where possible. Go for value, not cheapness…and don’t forget that ignorance is a breach of fiduciary responsibility.

3) Exercise care in selecting the investment options for the plan, and also be sure to properly monitor them. This includes a documented paper trail supporting decisions and ongoing analysis.

4) Maintain good lines of communication with plan participants. This will avoid many potential problems.

5) Provide efficient plan administration, including timely filing of Form 5500, timely distribution of the Summary Annual Report, properly updating and distributing the Summary Plan Description, etc.

6) Avoid self-dealing and prohibited transactions, especially the late deposit of employee deferrals into a 401(k) plan. Remember that employee deferrals should be deposited into the plan as soon as possible; the 15 business day window described in the regulations is not a safe harbor.

7) Document all significant actions taken.

8) Be familiar with and faithfully comply with all plan documents, including the investment policy. While you’re at it, make sure you: a) have an investment policy, and b) have kept it up to date.

9) Don’t be deluded into thinking that if you have a third party administrator, you have transferred responsibility for ensuring the plan is administered properly. The ultimate responsibility for the plan always rests with the plan administrator (which is almost always the plan sponsor), third party administrators can be hired to help with this responsibility, but if any errors occur it is the plan administrator’s responsibility to detect and correct them.

10) Periodically have an outside person conduct an independent compliance review. It’s much cheaper to have a CPA find the problems, and correct them yourself, than have the IRS or DOL find them and assess penalties (and did we mention jail?).

If despite your best intentions trouble does arise, remember that both the IRS and DOL look more favorably on employers who have made good faith efforts to comply with the rules than employers who take the “I don’t know the rules, that’s why I hired Merrill Lynch” approach. But what if you really don’t know the rules? Hire a CPA or attorney who specializes in pensions to help you.

In the long run, it’s better than making friends with Robbie the rat.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.