As an advisor to many 401(k) plan sponsors, I have been asked occasionally what advice I would give to a person who is relatively new to retirement plan administration. While some aspects of administration may only be learned through experience, here are my top 5 things to understand about plan administration.
1. Identify the service providers, and understand what they will and will not do. Every 401(k) plan has a plan administrator, a recordkeeper, and a trustee. Most also have an investment advisor and a benefits attorney (see my prior post about when to call your benefits attorney here). The duties and responsibilities of each player is described in a signed agreement that the new benefits administrator should locate, review, and put in a safe place for easy access in the future.
Per the plan document, the plan sponsor is automatically the plan administrator, unless the plan sponsor has designated in writing one or more persons to be the plan administrator. Sophisticated plan sponsors appoint one or more officers or senior employees to a committee and designate the committee as the plan administrator, thereby delegating the responsibility for making decisions to a core group that is involved in day-to-day operations of the plan. The committee or plan administrator is a fiduciary under ERISA and therefore its decisions must be made in the best interest of the plan participants. In making decisions, the plan administrator must review the terms of the plan document and, depending on the question, the plan administrator may find it prudent to consult with the plan’s advisors.
The plan document may consist of a check-the-box adoption agreement provided by the recordkeeper. If that is the form used by your company, make sure to obtain a copy of the base document, sometimes called the “basic plan document.” The base document is usually 70-90 pages long and includes standard terms and detailed language describing the rules by which the plan is to be operated. In addition, every plan must have a Summary Plan Description (“SPD”). This document contains a plain English description of the most important terms of the plan. While the SPD is a great place to start when there is a question about the plan’s administration, the applicable section of the plan document should always be reviewed before making a plan administration decision.
The recordkeeper could be an affiliate of a large mutual fund company, an accounting firm, or another entity. Their services include keeping track of the contributions, earnings, and distributions associated with the accounts. Some recordkeepers maintain websites on which employees may change contributions and make investment decisions. Other recordkeepers require the plan administrator to keep records of employee elections. To understand the services that your recordkeeper has agreed to perform, you need to read the service agreement between the company and the recordkeeper and note when the plan administrator must advise the recordkeeper to take action, and how the plan administrator’s directions are to be communicated to the recordkeeper. While recordkeepers are very knowledgeable about the law, every services agreement that I have seen states clearly that the recordkeeper does not provide legal advice.
The trustee is the person or entity that holds the contributions to the plan. If the trustee is an individual, such as the owner of the business, then usually a financial entity will hold the plan funds based on a custodial agreement. The trustee’s duties will be described in a separate document titled “Trust Agreement,” or in the trust section of the 401(k) plan document.
The investment advisor assists the plan administrator with selecting the mutual funds or other investment options to be offered to employees. This role could be filled by an individual or firm that is independent of the recordkeeper or it could be an affiliate of the recordkeeper. Here also, there should be a written agreement between the plan sponsor and the investment advisor describing the investment advisor’s fiduciary status and its compensation. The investment advisor may assist the company in preparing an investment policy statement. This document will describe the type of investments that may be offered to plan participants and the criteria used in monitoring the investment funds.
A new benefits administrator’s first step should be to gather copies of the plan document, SPD, recordkeeping agreement, investment management agreement, investment policy statement, and any other relevant documentation, and learn who are the service providers and advisors to the plan, and what they have agreed to do for the plan.
2. Understand how the money flows. 401(k) contributions are withheld from employees’ pay based on decisions made by the employee, and the terms of the plan. Since deferrals are employees’ money, the Department of Labor requires that deferrals and loan repayments be transferred to the plan’s trustee as soon as possible after they have been withheld from the employees’ paycheck. For plans with more than 100 participants, the Department of Labor expects that this transfer will take place on the same day that the company transmits to the IRS the taxes withheld from the employees’ pay. A new benefits administrator should learn its company’s processes for handling salary deferrals, starting with how an employee’s decision to contribute is transmitted to the payroll department, and then the steps that are taken to transmit the salary deferrals from the company’s bank account to the plan’s trustee. Sometimes the amount withheld from pay is not the same as the amount that the recordkeeper expects to receive, and someone at the company must reconcile the discrepancy. Any required reconciliation must be done quickly so to avoid the funds being held in the company’s bank account for too long of a period, which could cause a prohibited transaction.
Determine if the company has any one-off transactions – such as special checks for late-recorded overtime – that could be accidentally omitted from the amount transferred to the trustee. Every company should have an accounting process to confirm that funds withheld from paychecks are actually paid to the trustee. Ideally, the person responsible for this accounting process should be someone other than the person who is responsible for 401(k) plan administration.
3. Monitor plan loans. Most 401(k) plans allow participants to borrow from their plan account. Learn the process by which loans are made and the plan administrator’s role in making sure that payments are withheld from paychecks. How does the plan administrator identify individuals who are behind on their payments, perhaps because they were absent due to an unpaid medical leave? What are the plan’s rules for making up missed payments when an employee returns from unpaid leave? Fixing late loan payments can be time consuming and expensive for the company, so it is important to identify missed payments prior to the end of the plan’s loan repayment grace period.
4. Promptly pay out terminated employees with small balances. If the 401(k) plan allows the trustee to pay out, without the terminated employee’s consent, account balances under $5,000, make sure that those payouts happen. Individuals with small balances sometimes forget (or don’t even know) that they have an account with the plan. Keeping these accounts in the plan could unnecessarily increase the plan’s recordkeeping costs. In addition, for plans that have between 100 and 120 participants, cashing out these accounts may save the company from being required to obtain an audit for the plan. By taking steps to quickly cash out small accounts, the plan administrator minimizes the chance that it will lose track of former employees and avoids an extensive search later to find them.
5. Recognize when a new employee is actually a rehire. ERISA’s service crediting rules may allow a rehired employee to count prior service as current eligibility service. For example, if the plan requires an employee to complete six months of service before making salary deferrals, a rehired employee may be eligible to start deferrals as of the date of rehire because of prior service. In addition, the prior service counts for vesting service. Understand your company’s process for identifying rehires so to ensure that they are given credit for their prior service. Some employers have found that the best practice is to ask on the employment application form if the individual has previously worked for the company or any of its related entities.
A new benefits administrator that has prior experience at another company or with a different recordkeeper must be on the lookout for processes that are not consistent with prior experiences. A close reading of the relevant documents should be the first step in understanding your company’s processes for plan administration.
About the Author: Deborah Grace is a Member in Dickinson Wright’s Troy office where she advises business owners, human resources professionals and plan fiduciaries on the complex laws that impact the design and administration of their retirement and welfare benefit plans. She has extensive experience advising clients on the employee benefits aspects of business transactions, and fixing inadvertent errors in plan administration. She can be reached at 248-433-7217 or email@example.com and you can visit her bio here.