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5 ‘Little’ Things That Can Become Big 401(k) Problems

There are a lot of big and complicated decisions associated with running a retirement plan. And then there are the “little” ones that turn out to be not-so-little, and far more common than you might think.

Not depositing contributions on a timely basis.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common flags that an employer is in financial trouble — and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

Not providing required notices to participants (e.g., safe harbor notices or QDIA notices).

The law provides plan fiduciaries with certain protections conditioned on the timely provision of notices deemed sufficient to alert participants to their rights and the obligations of the plan fiduciaries. This holds true with so-called “safe harbor” plan designs as well as the selection of qualified default investment alternatives (QDIAs), or the implementation of automatic enrollment, where the participant could opt out of deferrals, select a different deferral amount, or select another investment option.

While the implications of failing to provide a timely notice vary depending on the purpose of the notice, generally speaking, a failure to provide the notice invalidates the protections afforded the fiduciary.

Failing to obtain spousal consent.

The IRS notes that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse. This often happens when the sponsor’s human resources accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married — or remarried). The failure to provide proper spousal consent is an operational qualification mistake that would cause the plan to lose its tax-qualified status.

Paying expenses from the plan that are not eligible to be paid from plan assets.

Plan sponsors are frequently interested in what expenses can be paid from plan assets. The first step in that determination involves making sure that the plan document allows the payment of any expenses from plan assets.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which — if they are reasonable — may be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate, or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.

Not seeking the help of experts when you lack the expertise to make fiduciary decisions impacting the plan.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law — and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

Simply stated, if you lack the, skill, prudence, and diligence of an expert in such matters — you are expected to get help.