The plan document is not a suggestion; it’s a roadmap to compliance and competent and effective administration. But it’s not always given the regard it deserves—which can imperil a plan and those whom it ultimately was written to serve.
Oops
Robert M. Kaplan, Director of Technical Education at the American Retirement Association, says “it is rare” for plan administrators to intentionally not follow the plan document; rather, such errors are most often inadvertent.
Says Kaplan, “The retirement plan rules are so complicated and there is so much data involved (census/financial transactions/preparation of filings, etc.) that it is easy to make inadvertent errors”; in addition, “there are cases when someone does not deposit contributions or payments timely, takes a distribution when the document does not allow, etc.”
Another inadvertent mistake, suggests says Scott D. Michael, a financial advisor with Savant Wealth Management in his recent discussion of common fiduciary errors, can involve the investment policy statement (IPS). In an invocation of the principle that sometimes no good deed goes unpunished, he notes that there have been instances in which an employer acted in the participants’ best interest, but in the process failed to follow the letter of the IPS—and a lawsuit costly to the plan sponsor resulted.
Misinterpreting plan document provisions is “possibly the most frequent” reason behind fiduciary breaches, says Michael.
Michael notes that it is common for plan administrators to say that they determine how a plan provision applies in the way their predecessor said it should be. But that is not a guarantee that the provisions are being followed as they should, nor does that evoke confidence that is taking place, he warns. Michael adds that “many administrative errors go on for years,” perpetuating fiduciary breaches.
Failure to follow the plan document can also arise when the definition of “compensation” in the plan document and the definition a payroll department or payroll service uses do not jibe, says Michael. In addition, he says, they can use different naming conventions for the aspects of compensation and monetary transactions, such as deferrals, employer matches, bonuses, pre-tax health insurance premiums, commissions and tips, and fees.
Treatment of compensation, not just the terminology surrounding it, can also be a pitfall, Michael warns—for instance, in management of plan forfeitures, which he says “can be especially troublesome.” He notes that such assets should be allocated annually at the end of the year. Not doing so breaks the rule against unallocated assets, Michael warns, which can result in “a costly and administratively cumbersome correction.”
Director of Retirement Plan Services Patty Hutchinson joins her Savant Wealth Management colleague Michael in telling NAPA that, “In our experience, errors—such as delays in participant deferrals or plan forfeitures, happen frequently—especially when plan sponsors are trying to navigate the administration of their plans alone” and without the help of a professional.
Robert Richter, American Retirement Association Retirement Education Counsel, focused on operational errors in his remarks to NAPA. “We know some common operational failures can oftentimes be considered failure to follow the terms of the plan,” he says, elaborating that “it’s usually small plans where an owner/plan administrator takes actions contrary to the plan (and possibly the law) in doing things with his/her account such as taking withdrawals.”
Not only that, but Richter also says that some failures to follow the plan document result from regard for ERISA. “I think a lot of the cases are where the administrator thinks that following the plan is contrary to ERISA and therefore refuses to take action,” he notes.
And it’s not always plan administrators that are at fault, Richter adds. “For eligibility and compensation errors, it’s probably more employer error in giving bad data rather than the PA improperly applying the plan provisions,” he says.
Consequences
Failure to follow the terms of the plan document “would be a breach of fiduciary duty,” says Richter.
If a plan administrator fails to follow the plan document, there could be a variety of consequences—some minor, some serious. Richter notes that the sanctions for such a violation depend on how severe the specific failure is.
Kaplan elaborates, warning that the penalties “could range from minor penalty payments (such as for late deposit of deferrals) to plan disqualification (very rare). It is these threats of disqualification that ‘encourage”’ compliance. Richter says that, “There could be monetary sanctions, criminal sanctions, and the individual could be prohibited from serving as a fiduciary.”
“As fiduciaries, plan administrators are ultimately responsible for protecting the interests of their plan participants. If the plan administrator does not follow the plan provisions, the employer could face fines and/or penalties, including personal liability to restore participant losses that could have been avoided,” warn Hutchinson and Michael.
Action Steps
There are steps a plan sponsor can take to make sure that the plan administrator follows the plan documents and that procedures match plan provisions.
Service Providers. Kaplan puts care in selecting service providers at the top of the list. “I would say that the number one thing that a plan can do is hire competent service providers and follow their instructions,” he says.
Documentation. “Another step is to have documented practices and procedures (I am big on checklists),” Kaplan says.
Compensation. Michael suggests that the administration of compensation should be adjusted so it is consistent with changes that are made to plan documents. He adds that it is “a good idea” for these to be checked against each other periodically.
Check Data. Kaplan suggests that a plan sponsor may find it useful “to have double checks on all data being submitted or reviewed.”
Education. Many plan sponsors and fiduciaries lack awareness of their roles and responsibilities, says Michael. Kaplan and Richter, too, stress the importance of education.
Kaplan points out that the DOL and the IRS provide information online; he adds that a plan’s financial advisor often will provide fiduciary training for clients, and that third-party administrators and recordkeepers can do so as well. Richter adds that the DOL periodically conducts in-person programs around the country.
Federal Correction Tools. There are tools the federal government provides as well that can be used to correct errors and reduce the risk of fines and penalties, Michael reminds. Namely, the Department of Labor’s Delinquent Filer Voluntary Compliance Program (DFVCP) and the Voluntary Fiduciary Correction Program (VFCP), and the IRS’ Employee Plans Compliance Resolution System (EPCRS), which includes the Voluntary Compliance Program (VCP) and Self Correction Program (SCP). Richter adds that the IRS has outlined steps that can be taken to better ensure operational compliance, which are available here.
“At a minimum, we recommend that plan sponsors follow a fiduciary checklist, and/or a compliance calendar. These tools can help plan sponsors stay on top of tasks and time frames critical to the administration of their plans. If a plan sponsor partners with a retirement plan advisor, their annual fiduciary meeting can serve as an additional opportunity to review the plan to ensure everything is in good order,” say Hutchinson and Michael.
Finding Out More
Richter adds that the American Retirement Association’s ERISA Outline Book provides information helpful in following plan documents and making sure they and procedures remain in compliance.
More information about the ERISA Outline Book is available here.
