Resolve to make retirement plans more effective

January 1st is right around the corner and we all know what that means… it’s time for New Year’s resolutions. While it’s second nature to resolve annually to improve ourselves, why not take a few minutes to resolve to make our retirement plans more effective and our 401(k) audits less stressful? Here is a list of ten ideas plan sponsors can adopt in order to improve their retirement plans and lessen the burden of audit season:

1. Create administrative procedures and internal controls—and follow them. I recently sat in on an industry meeting focused on what the IRS looks for during audits. It was no surprise that the most important item was a Plan Sponsor’s internal controls. From a specific listing of what each party does in relation to the retirement plan to preventative (front end) and detective (after the fact) procedures, most auditors would agree that plans with better internal controls tend to have better administration. Does your plan have service agreements with your service providers and are they close at hand in case you need to reference them? Is it clear which portion of administration your recordkeeper and investment advisor are responsible for? Even though a majority of your retirement plan administration may be outsourced, as a Plan Sponsor you still have a fiduciary responsibility to the plan and should hold your service providers accountable for the services they agreed to.

2. Make sure changes to your operating procedures are well documented. Over the last few years, has your plan changed your fee allocation method from pro rata to per capita? Have you decided to allow participants on leave-of-absence to request a new loan? Did you decide to start sending enrollment kits on a weekly basis rather than a monthly one? Do some of these changes sound familiar, but you’re really not sure if you came to a consensus or implemented them? There are lots of operational procedures that are not hard coded into your plan document, which is why they are even more important to document clearly. The plan should have standard procedures in order to ensure that it is operating in a consistent manner.

3. Audit your data. A Plan Sponsor’s relationship with a service provider is one of obligate symbiosis (working together in order to survive), and the most successful plans exhibit a high level of mutualism. The data you feed as a plan sponsor to your service providers drive their ability to determine eligibility, vesting, contribution calculations, discrimination testing, 5500 reporting, etc., and in return feed that data back to you for administration. Bad data can result in a number of operational failures that may require corrections, and corrections can be costly. A few common pitfalls for plan sponsors include:

• Reporting compensation that doesn’t match the definition of compensation in your document.
• Reporting different compensation at each location.
• Not reporting hours when your plan determines eligibility based on an hours requirement.
• Not withholding deferrals on bonus, stipend, or an extra payroll if included in plan’s compensation definition.

Any changes to the definitions used in your plan should be relayed to your recordkeeper, and payroll systems should be periodically audited to make sure they reflect the correct definitions. Working with service providers is a partnership and you depend on each other for survival and keeping your plan happy and healthy.

4. Transmit contributions in a timely manner. The Department of Labor established a seven business day safe harbor for plans with less than 100 participants for prompt contributions. Plans with 100 or more participants are expected to remit contributions on a common cycle and within a consistent time period. Once an earliest deposit date is established, you are expected to keep it. The traditional rule of 15 business days following the end of the month no longer applies. What happens when your company payroll administrator goes on a month- long vacation? Do you have a back-up administrator? Failure to deposit in a timely manner can be extremely costly to you as the plan sponsor, must be reported on your annual Form 5500, and can raise additional audit questions. Save documentation showing prompt deposit of contributions and the use of forfeitures to fund employer contributions. At Milliman, we monitor this for our clients, sending an automated reminder (or notice) when files transmitted sit unfunded for a certain number of days.

5. Establish a Retirement Committee. As a Plan Sponsor, why do you offer your retirement plan? Do you want to ensure your employees have a sufficient nest egg when they retire or do you just offer it to stay competitive in the marketplace? No matter what the original purpose, it’s important to institute a committee with clear, measurable goals for the plan. The committee should stay abreast on regulatory updates and industry and design trends. It should propose and/or implement any necessary changes to the plan to help cultivate its success and keep copies of meeting minutes as support for plan changes. The retirement committee may also be responsible for monitoring and selecting new investments for the plan. Remember that the investments offered by the plan should be for the “exclusive benefit of your employees and their beneficiaries,” and adopting an investment policy or statement may help to define guidelines for investment selections.

6. Understand plan fees. Plan fees have constantly been on everyone’s radar screen since 2010 when the Department of Labor first issued fee disclosure regulations. It’s now four years later, and fee transparency should not only be required from all vendors but also should be expected. Do the investments offered by your plan pay revenue sharing and are these dollars made available to the plan to use to pay expenses or reallocate to the people invested in the funds that generated the income? Your retirement committee should regularly evaluate and benchmark whether the fees the plan pays its service providers, whether bundled or individual, are reasonable. More insight on plan fees here.

7. Audit your service providers. Schedule time to evaluate whether your service providers are providing the services they agreed to and charging the fees that were agreed upon. It’s important to both review and save copies of items received from your service providers for audit time. Examples of some of these items include:

• Annual required participant and plan sponsor notices
• Invoices for services provided
• Summary Plan Description (SPD) or Summary of Material Modification (SMM)
• Copy of a current enrollment kit
• SSAE-16 for service providers
• Service contracts

8. Conduct an annual plan review. Now that you have established a retirement committee and set goals for the plan, it’s important to evaluate how your plan is performing. In addition to your quarterly or semi-annual investment monitoring, sit down with your service providers and discuss the plan’s performance over the past year. Note areas of the plan that seem to be lacking, underperforming, or causing an administrative headache. Are you constantly issuing contribution refunds to your highly compensated employees (HCEs) due to your nondiscrimination testing results? Maybe it’s time to think about adding a contribution limit for your HCEs or adopting automatic contributions to raise the participation of your non-highly compensated employees. Reviewing your plan performance annually can be a great conversation starter and can lead to a valuable opportunity to consult with your investment advisor or Milliman consultant.

9. Establish success measures. Is participation important? Is the average contribution rate of your employees? The average number of funds utilized by each participant? The retirement readiness of your participants? Identify success measures that you can monitor and track from year to year in your annual review.

10. Establish a strategy for the upcoming year. Once you’ve reviewed your plan’s performance, come up with a strategy to improve your outcome. Then set a schedule with your providers to identify actions to be taken, communications to be delivered, and strategies to be employed.

Adhering to New Year’s resolutions may be tough, but can prove very beneficial.