Some would say that retirement plan administration is a team sport! Putting together technical and compliance competence with ongoing investment and fiduciary expertise is key to keeping your plan healthy and participants happy. So, what roles and responsibilities should you look to fill for your firm to have a successful and compliant plan?
The first and most important role is you, the Plan Sponsor. Plan Sponsors elect to establish the plan and offer it to their employees. Though many employers act as the named Plan Administrator of the plan, to ensure a successful outcome, they assemble a team of professionals to fulfill the key roles that keep a plan on track. The team’s goal, following the direction of the Plan Sponsor, is to deliver a program that provides retirement security for the plan participants.
Key Team Players
Beyond the sponsorship and ultimate oversight of the plan, the following are key roles which are vital to a well-run plan.
Third Party Administrator (TPA) – Not to be confused with the named Plan Administrator, the TPA plays a critical role in the maintenance of the plan and the coordination of the team. The TPA is typically the “go-to” resource for HR personnel for questions regarding the day-to-day operation of the plan and the coordinator among other service providers in the plan’s ecosystem. More than reliable customer service, TPAs are trained professionals that provide technical expertise to ensure the plan complies with current regulations governing retirement plans. ERISA, DOL regulations, and case law are complex and frequently change. Compliance is daunting, and penalties and back taxes can be significant. So, it is important that a dedicated TPA is engaged. Common duties include:
- Providing guidance on plan design.
- Preparing and maintaining legal plan documents.
- Performing compliance testing.
- Preparing annual valuations and benefit statements.
- Completing and filing all forms with the government.
- Performing non-discrimination testing.
Financial Advisor – An equally important counterpart to the TPA role is the plan’s financial advisor. In tandem with the TPA, advisors help Plan Sponsors decide the goals for the retirement plan. These goals are then translated, with the TPA, into a plan design and ultimately a written plan document that guides the operations of the plan from year to year. The financial advisor also helps the Plan Sponsor select and monitor the investments in the retirement plan. In a 401(k) plan, where participants may direct their account balances, the advisor will assist the Plan Sponsor in selecting a recordkeeping platform and a line-up of investment options from which the plan’s participants will choose. The advisor may also:
- Oversee investment meetings.
- Act as a guide and educator to the plan’s participants through the initial enrollment process and subsequent enrollment meetings.
- Act as a co-fiduciary to the plan.
Recordkeeper/Custodian – The recordkeeping platform in a participant directed 401(k) plan keeps track of the participant’s investment selections and account balances. The plan’s custodian holds the plan’s assets and handles buying and selling of investments for contributions, investment exchanges, and distributions. These services can be provided as a bundle or independently offered.
Other important members of the team:
- Payroll Providers – Payroll providers play a key role in 401(k) plans by recording participant salary deferral percentages and calculating the deductions and appropriate taxes on the contributions to the plan.
- Plan Auditor – For plans over 100 participants, a financial statement audit is performed by a certified public accountant.
- Retirement Plan Fiduciary – Though not a requirement, many advisors have migrated to taking on a fiduciary role in retirement plans by acting in a 3(21) or 3(38) capacity.
- ERISA Attorney – Many Plan Sponsors and TPAs may need the assistance of an ERISA attorney in certain areas of retirement plan administration such as QDROs, voluntary compliance programs, or in the event of a legal action against the plan.
- 3(16) Fiduciary – A Plan Sponsor may hire a firm to fill the role of the Plan Administrator as stated in the plan document.
Bundled vs Unbundled Servicing Options
As with most things in life, there is no perfect answer that fits everyone in every situation. Many of the services mentioned in this article can be linked together and offered in “bundles.” On the surface, this may seem the easier route, but bundled does not give the Plan Sponsor the ability to evaluate each component on its own, so many trade-offs in services and expertise may occur.
An unbundled approach strives to offer the Plan Sponsor a more a la carte approach to the services they use to design their plan. With a good TPA and advisor relationship, the Plan Sponsor can be easily guided through the selection process by relying on the experience of these professionals. Many believe this approach ultimately ends up with the design and structure that works best for their employees. Be aware that, though cheaper fees and overall costs may be offered through bundled providers, it is possible that recordkeeping or compliance costs are being offset in other areas like investment management fees.
Ultimate Oversight
Ultimately, the Plan Administrator and Plan Sponsor must ensure that the service providers are fulfilling their duties. By relying on a close relationship with their TPA and Financial Advisor, Plan Sponsors can feel confident that they are creating a plan that will serve the retirement needs of their employees and steer clear of any issues with governing entities.
©2021 Benefit Insights, LLC All rights reserved.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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