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401(k) Plans – Always Room for Improvement

Jun 26, 2017

Offering a retirement plan can be one of the most challenging, yet rewarding, decisions an employer can make. Whether it is a means to stay competitive in the marketplace or a tool for employee retention, more and more companies are offering retirement benefits. Some plans have been around for many years, while others have just been created in the last few years. Regardless, all plans have room for improvement no matter what the plan size. Below are five common challenges with 401(k) plans and the best practice recommendations that address them and help a plan operate smoothly and efficiently:

#1: Plan documentation – Not implementing the plan in accordance with the executed plan document.

Very often a plan sponsor signs the plan documents and sends them off to the third-party administrator, but never receives back an executed version for its records or review to ensure all items are written consistent with management’s intention. The executed document should be easily accessible and should be precise and clear on how the plan will be operated. Well-written plan documents will leave no grey area or room for interpretation when it comes to operating a plan.

Best Practice: Recommend annual review of plan documents to ensure plan specifications remain current and consistent with the intentions of the plan sponsor.

#2: Fiduciary responsibilities – The plan sponsor is unaware of the fiduciary responsibilities it is bound to.

The Employee Retirement Income Security Act (ERISA) sets standards of conduct for those who manage an employee benefit plan and its assets. Fiduciary responsibilities include, but are not limited to, acting solely in the interest of the participants and their beneficiaries, diversifying plan investments, and paying only reasonable plan expenses.

The responsibility covers a wide range of functions, and it may be in the plan sponsor’s best interest to consult experts in areas it is not familiar with. If fiduciaries do not fulfill their duties, they can be held personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan’s assets resulting from their actions. Fiduciaries can limit their liability by documenting the processes used to carry out their fiduciary responsibilities.  

Best Practice: Recommend the plan sponsor or those charged with fiduciary responsibilities meet periodically with the third-party administrator to discuss plan expenses, plan investments, and other applicable items.

#3: Timely remittances – Employee elective deferrals are not remitted to the plan timely.

This is one of the most common areas of concern when the IRS comes in to review a plan. Although not common, some plan documents will define the time period in which the deposit should occur. If not defined, participant contributions are required to be deposited in the plan as soon as it is reasonably possible to be segregated from the sponsor’s assets. Therefore, if an employer can reasonably make the deposit sooner, they need to do so.

If the remittance is outside of a reasonable time period, the IRS has provided an online 401(k) Plan Fix-It Guide to assist with the correction. Depending on the type of mistake, there are a variety of ways to correct it, from self-correction to voluntary correction. The plan must also include lost earnings for the time frame of the late remittance. The third-party administrator can help assist in the calculation and remittance of any late contributions and lost earnings.

Best Practice: Recommend the plan sponsor reviews its processes and procedures to ensure it is remitting contributions as soon as it is reasonably possible, typically within a week after payroll.

#4: Eligible compensation – Compensation used for calculation of contributions is not in accordance with the plan document.

Eligible compensation is defined in the plan document and should be easy to understand; however, it is one of the most common areas where errors are found. Often the plan document is very vague on exclusions to eligible compensation; for example, what are fringe benefits? The plan sponsor’s interpretation of fringe benefits may be different than the payroll provider or the HR generalist who operates the plan. There may also be different definitions of eligible compensation for employee deferrals and sponsor contributions. It is important to determine what is included or excluded from eligible compensation.  

Best Practice: Recommend an annual review of pay codes to ensure that compensation used for employee and sponsor contributions is being calculated in accordance with the plan documents.

#5: Auto enrollment and auto escalation – Employees are not timely and consistently automatically enrolled into the plan or automatically escalated in a specific time period.

Auto enrollment is becoming more common as a way to increase participant involvement in the plan. As the world becomes more electronic, it is getting harder and harder to monitor these activities. Often times it is the third-party administrator that takes on the responsibility of auto enrolling participants and auto escalating them. Even though the third-party administrator is in control of this, it is the plan sponsor’s fiduciary responsibility to monitor these activities and make sure they are in accordance with the plan documents.

Best Practice: Recommend the plan sponsor periodically review auto enrollment and auto escalation, including timing of enrollment or escalation, to verify that the plan is operating in accordance with the plan documents.

Benefit plans require constant attention and monitoring; it is not something that should be set up and forgotten about. However, by following these best practices and having the proper benefits in place, an employer can both operate its plan smoothly and efficiently and attract the right employees, which is well worth the investment.


Kayla M. Schuppel, CPA
Senior Manager, Audit
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