A recent report highlights five key 401(k) risk areas that advisors might want to keep an eye on.
The report by ThinkAdvisor was based on an assessment of 19 “red flags” gleaned from Form 5500 filings by Judy Diamond Associates.
Here are the five warning signs:
Inadequate Fidelity Bond Coverage
More than 70,000 sponsors of 401(k) plans are carrying insufficient levels of fidelity bond insurance, according to data mined from Judy Diamond Associates Retirement Plan Prospector tool. It was, in fact, the top red flag in JDA’s most recent analysis, according to the ThinkAdvisor.
A recent NAPA Net reader poll found that just over half (53%) of respondents said that fiduciary insurance/coverage levels were not only a factor in their current RFP process, but were a growing one. About a quarter (27%) said that it was a factor, while the remaining 20% said it wasn’t.
Reduced Employer Contributions
The JDA analysis noted that 32,354 plans experienced reduced employer contributions, noting that when employers reduce, or eliminate matching contributions, it is often an indication that the sponsor is in financial trouble, though there are certainly any number of alternative, less gloomy rationales for that result.
Corrective Distributions
According to the most recent available data from the Labor Department, a significant portion of the 401(k) universe (57,410 plans, according to Judy Diamond) issued a corrective distribution under the IRS’s nondiscrimination test, which ensures that elective and matching contributions for rank-and-file employees are proportional to contributions from business owners, managers and other highly compensated employees. While it might not be signs of a real problem, it might suggest an opportunity for a better scrutiny on an interim basis, so that HCEs aren’t forced to deal with the complications frequently associated with these corrective distributions.
A History of Corrective Distributions
Having to make a corrective distribution one year is one thing – but doing so on an ongoing basis could be indicative of a more serious problem. The JDA analysis noted that 28,251 plans showed a “history” of having to make corrective distributions.
Retirees Leaving Money in the Plan
Arguably this is not necessarily a problem – indeed, the Labor Department has suggested that this would be a positive outcome from the fiduciary regulation, and researchers have opined that this would, in fact, be a consequence. That said, Judy Diamond notes that 56,275 plans had a “high percentage” of retirees with assets still in the plan, which the report notes means that the plan continues to pay administrative costs on those assets, which can increase overall plan expenses.
What do you think? Are these potential risk factors indicative of a problem before it happens? Are there others? Comment below.
