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Is Your 401k Plan in Good Order?

By John J. Higgins

One of the most important duties of a retirement plan sponsor is to ensure that the plan is in compliance with legal requirements – and it’s no easy task, especially for contractors with high employee turnover. The Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) have specific requirements, and U.S. Department of Labor (DOL) audits are on the rise for contractors.

One way to ensure that you are complying with ERISA and IRC requirements is to review your plan annually and follow administrative best practices.

Keep the Plan Accurate & Current
Ensure that your plan document is up-to-date and aligns with the company’s goals and objectives. There are statutory deadlines for adopting changes to keep your plan within the law. You may be able to use a prototype or a volume submitter document to provide assurance that your plan is compliant. Consider using an independent third-party administrator (TPA) in lieu of your recordkeeper.

Follow Plan Terms
It sounds obvious, but failure to follow plan terms is a top mistake, according to DOL auditors. You are ultimately responsible for keeping the plan compliant. Regularly communicate any plan changes to all service providers, plan fiduciaries, and staff to ensure accurate administration.

Follow the plan’s definition of compensation for determining contributions – especially if bonuses are paid to employees.

Finally, don’t overlook the plan’s eligibility requirements. Ask your TPA for assistance if you are uncertain on how to apply the eligibility provision.

Adhere to Timely & Accurate Recordkeeping & Processing
Late or irregular deposits of employee deferrals and loan repayments is another common compliance mistake among contractors. The law requires that employee deferrals and loan repayments be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets. A good rule of thumb is to remit employee contributions within 3-5 days from being withheld from an employee’s paycheck. Be consistent among all payrolls and pay periods.

Provide Ongoing Participant Education
Per IRC § 404(c), you must provide plan participants with enough information to make educated investment decisions. Ask your plan provider what plan communications (e.g., account statements, prospectuses, descriptions of fees and expenses) and participant education materials are included in your plan fees.

Establish a Written Plan Investment Policy
Although ERISA does not require such a document, this will help demonstrate that you follow a prudent process for choosing and evaluating plan investment options in the event of an audit. Make sure you follow the investment policy statement and carefully monitor and benchmark plan investments at least annually. Document when and why you add or remove any investment options from the fund menu.

Satisfy Nondiscrimination Tests
If you fail nondiscrimination testing and don’t take timely corrective action, then it could result in plan disqualification. Consider safe harbor provisions or automatic enrollment to help with your testing. Work with your TPA and other key parties to ensure that all employees are correctly classified on the year-end census (e.g., key employees and highly compensated employees).

Monitor Providers
Fiduciaries are responsible for ensuring that the services provided to their plan are necessary and reasonably priced. Ask your service providers for copies of their written service agreements.

Issue a request for information (RFI) or request for proposal (RFP) at least every 3-5 years to ensure that you are receiving the most value. It’s a good idea to work with an experienced plan advisor who operates independently.

This list is not all-inclusive. It’s important to develop best practices that are tailored to your business needs and the requirements of your specific retirement plan. The IRS and other resources can help you establish your own guidelines.

Web Resources:
Adams, Nevin E., “10 Things You’re (Probably) Doing Wrong,” PLANSPONSOR, August 2009.
IRS Publication 4531: 401(k) Plan Checklist and IRS 401(k) Fix-It Guide, Rev. 11/2008.

John J. Higgins is a financial advisor located at Patterson Smith Associates, LLC in Morristown, NJ. John offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network. He can be reached at 973-326-9300 or