Top Fiduciary Mistakes Plan Sponsors Make with Qualified Retirement Plans
Running a qualified plan can be difficult and time consuming. Below you will find a rundown of the top fiduciary mistakes that plan sponsors make, a reference to the law or guidance governing the mistake, and how to determine if you are making this mistake now.
- Plan Sponsor does not have regularly scheduled meetings to review their plan(s). According to the Department of Labor (DOL), fiduciaries can limit liability by documenting the process used to carry out fiduciary responsibilities. We suggest meeting at least twice a year to formally review the plan, at minimum once per year. If you do not know when your next plan review is then that is a problem.
- Plan Sponsor cannot provide proof of deliberation regarding decisions made on the plan. Again, documentation is key to carrying out your fiduciary duties. If an IRS auditor or DOL investigator walked into your office and asked how did you select your recordkeeper or a particular investment (or any other decision related to the plan) can you produce documentation illustrating that you considered various options, reviewed the pros and cons of each, and generally used prudence to make decisions? What about an Investment Policy Statement (IPS)? How do you use the IPS to monitor the plan? Usually, this proof of prudence is in the form of meeting minutes and plan review materials saved in your fiduciary file. If this information is not easily accessible, then it should be remedied.
- Plan Sponsor does not take advantage of risk mitigation techniques for the plan’s investments. Plan sponsors can mitigate risk by hiring an investment advisor and by selecting certain default investments meeting DOL safe harbors. If you do not have in-house investment expertise, the ability/technology to evaluate the plan’s investments against peers/benchmarks, or the time, it probably makes sense to hire an advisor to perform this work. Additionally, selecting a proper qualifying fund(s) as the default investment can insulate investment selection risk. If you are unsure how you evaluate your plan’s investments, do not have time, or do not understand if your plan’s default investment(s) provides protection then this is an issue.
- Plan Sponsor does not update employee deferral elections in a timely manner. Having late deferrals indicated on your 5500 is one of the easiest ways to trigger a plan audit. This means that you must figure out an efficient way to ensure that employee deferral elections are captured in a timely manner – including automatic enrollments. Having a proper connection with your 401(k) and payroll and monitoring it weekly is a best practice. Additionally paper enrollment or deferral change forms cause issues. Why do you, as the plan sponsor, want the burden of keeping track of forms? Allowing employees to only change deferral elections through the recordkeeper (internet, application, or phone) is the proper method and places the burden to keep records on your recordkeeping partner. If you do not have a connection between 401(k) and payroll, do not have an internal process to monitor deferral changes, or still use paper forms then it’s time to reevaluate.
- Plan Sponsor does not review pricing for their service providers. The law requires fees charged to a plan to be “reasonable”. To meet your fiduciary responsibilities, we suggest comparing services and costs from each service provider (recordkeeper, TPA, investment advisor, investment funds) every two to three years. If you have not done this recently you should take action.
- Plan Sponsor does not audit investment funds for the least expensive net share class. One area of much ERISA litigation is investment share class selection. If two funds have the same underlying investments, but one is more expensive, then what is the rationale for holding the more expensive fund? There is not one. We suggest pursuing a share class audit every two to three years to ensure your plan is using the correct share classes, as investment firms are always updating their product offerings/reducing fees. If you do not regularly perform share class audits you should build this into your process.
Have questions? Reach out to Chris Burke of LoVasco Consulting Group at 313-394-1717 or email@example.com. Additionally feel free to add yourself to our distribution list by clicking this link and subscribing with your email under the Insights section.
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June 27, 2022
March 11, 2022
This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.
Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. LoVasco Consulting Group is independently owned and operated.
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