Top 401(k) Plan Headaches
Here are some common issues that can cause headaches for plan sponsors:
- Uploading Payroll
- Determining Eligibility
- Investment Changes
- Distributing Notices
- Regulatory and Legislative Updates
1. Uploading Payroll
A seemingly straightforward process can quickly turn into a minefield of errors. Incorrect data entry could lead to improper contributions, potentially resulting in legal and financial complications. One area of particular focus is the plan’s definition of compensation. When a special payroll cycle includes different types of compensation, such as bonuses, commissions, or overtime, it’s important to know whether that compensation should be included or excluded from the 401(k) plan. This specific issue ranks #2 on the IRS’ Top Ten Failures Found in Voluntary Correction Program.
2. Determining Eligibility
When an employee may enter a 401(k) plan is different for each employer. Common eligibility requirements include 21 years old and 1,000 hours of service. Then the employee can enter the plan on the next entry date, for example, January 1st and July 1st.
However, effective January 1st, 2024, there are new eligibility rules for long-term, part-time employees. Under the SECURE Act, employees who have worked 500 hours for three consecutive years are eligible to participate in the 401(k) plan on January 1st, 2024.
3. Over-Contribution Quandary
An employee might max out their savings and end up getting money back due to annual contribution limits. This creates extra administrative work and potential confusion for both parties. Get ahead of this by running a report to learn if any employees are close to or have maxed out their 401(k) plan.
4. Investment Changes
Moving from one investment option to another can be complex, requiring professional guidance from a 3(21) or 3(38) investment fiduciary. Plan sponsors should work with a 401(k) advisor, like us, to evaluate watch list funds and then implement recommendations based on your plan’s Investment Policy Statement. Additionally, it’s critical to communicate these changes to plan participants.
5. Distributing Notices
Ensuring all employees receive timely and accurate information about their 401(k) plan can be daunting, especially for large companies. One idea is to work with your recordkeeper and instruct them to send notices. Another idea is to hire a 3(16) plan administrator to send out and track required plan notices.
6. Regulatory and Legislative Updates
Staying informed and compliant with the ever-changing landscape of retirement plan regulations is a significant challenge. For example, the SECURE Acts are two long and lengthy pieces of legislation that greatly impact 401(k) plans.
401(k) Plan Headache Relief
This is where a 401(k) advisor can give a helping hand. We can offer valuable support and guidance across several key areas:
- third party administrator (TPA) communication
- recordkeeper collaboration
- investment strategy
- plan design support
- employee education
- fiduciary and regulatory guidance
While the role of managing a 401(k) plan can be fraught with potential pitfalls and headaches, the support of a specialized retirement plan advisor can significantly lighten the load. We can help streamline processes, establish compliance best practices, educate employees, and foster an efficient retirement plan.