Avoid These Common Plan Sponsor Mistakes

Once you’ve done the tough work of creating and implementing a retirement plan for your organization, you might assume that it’ll be smooth sailing from this point on. But the ongoing management of a well-functioning retirement plan can be far more challenging than it may seem. With so many different moving parts, it’s not unusual for things to fall through the cracks, even for the most meticulous plan sponsors. Learn more about some of the most common plan sponsor mistakes and how to avoid them.

Not Adhering to Plan Documents

The provisions set in your plan documents are central to the operation of the retirement plan. Plan sponsors and their committee(s) must operate in accordance to those qualified provisions. Correspondingly, the plan documents should be reviewed annually to ensure it maintains compliant. One of the more common plan sponsor mistakes is not properly following your plan’s provisions, which could leave your plan vulnerable to being stripped of its qualified status.

Eligibility and Vesting

The plan documents should include specifications regarding your employees’ eligibility and vesting rights, as well as the formula for determining them. It’s vital to maintain accurate records for all employees, otherwise you could be operating the eligibility and vesting schedule using incomplete or inaccurate information. This can be a disaster to unravel after the fact, especially for long-term employees, and may result in these employees receiving more or less in benefits than they were due. In addition, plan sponsors need to notify employees of plan contribution eligibility in a timely manner or else are subject to make a qualified non-elective contribution (QNEC) to the participant’s account, a cost of 50% of the missed deferral.

To comply with federal and state regulations, it’s important to create processes that ensure service records are accurate. This can often be accomplished by conducting an internal process audit each year or two, reviewing and tweaking forms as needed to keep your plan compliant with the goals outlined in your IPS.

Hardship Withdrawals and Loans

Many qualified plans permit hardship withdrawals and loans, but only under specific circumstances and if the participant has exhausted other resources. Because these hardship withdrawals are available in times of financial need only, plan sponsors must collect and maintain documentation of the circumstances behind the request. Extending a loan to a participant who doesn’t qualify under the terms of the plan documents could leave you with a tough-to-collect debt if the participant quits or is fired before the funds are repaid.

To ensure that hardship withdrawals and loans are compliant, plan sponsors should establish an approval process and documentation requirements which should include loan terms.

Lack of Benchmarking

Regularly benchmarking your plan fees and performance is a fiduciary obligation, and failing to appropriately monitor them can result in lawsuits from participants.

Evaluating Fees

There are three key factors every plan sponsor should know about their plan fees:

1. How much they’re paying in fees;
2. How these fees are paid; and
3. What services they are receiving from these fees.

Simply chasing the lowest fee does not ensure a high-quality plan, nor is overpaying for services you don’t need. However, there aren’t any across-the-board standards for plan fees, so it can sometimes be tough to know whether you’re getting the best deal. It is best practice to regularly review your service agreement, in addition to measuring your plan fees and comparing them to plans of similar size.

Evaluating Service Providers

As part of a plan sponsor’s fiduciary obligation to have reasonable plan expenses, it’s important to evaluate the performance and fees of service providers. Service providers must provide updates and reports regarding their fees and performance. It’s important to review these updates to ensure the arrangement and fees are deemed reasonable, and the service providers are acting in the best interest of your participants.

Failing to Provide Required Minimum Distributions

Required minimum distributions (RMDs) of pre-tax contributions must be made to participants age 70 ½ or older by April 1 each year (beginning the year the participant turns 70 ½ or retires from full-time employment). However, plan sponsors find it hard to track, especially when employees continue to work past 70 ½.

Failure to follow the required distributions in a timely manner can strip your plan of its tax-qualified status and create a major tax headache for participants or beneficiaries, who are subject to an additional 50 percent tax on any underpayment.

Other Common Mistakes

Many of the most common plan mistakes stem from a common source—the plan sponsor’s failure to truly grasp the fiduciary roles at play. This lack of understanding can be a springboard for many plan mistakes, some minor, some critical. These include:

• Failing to document reasons for plan amendments
• Filing an inaccurate Form 5500
• Allowing excess deferrals
• Failing to distribute required participant notifications

We Can Help You

As a plan sponsor, you have a lot on your plate. It can be easy to make any of these common plan sponsor mistakes. PlanPILOT can help. As an independent Registered Investment Advisor (RIA), we provide comprehensive retirement plan advisory services to a wide range of plan sponsors, including 403(b), 457, and 401(k). We also offer both 3(38) and 3(21) fiduciary services. Our holistic approach to retirement consulting, combined with our focus on reducing fiduciary risk, can provide you with peace of mind that your funds (and those of your employees) are in good hands. Please contact us at (312) 973-4911 or info@planpilot.com so we can help your retirement plan administration team and plan participants achieve better outcomes.

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