Retirement plans are essential for employees, and employers have to make sure they run well. However, mistakes can happen, leaving the employer and employee in a tough spot. This article explores the most common employer retirement plan mistakes and how to avoid them. Plus, you can download the Retirement Plan Excellence Kit to help your retirement plan run more efficiently.
Failure to implement employee deferral elections
One of the most common retirement plan mistakes is implementing employee deferral elections. The employee’s deferral percentage in the savings plan is either missing or incorrect. It’s easy to make errors with missing or incorrect data, but these mistakes can have a big impact. This mistake can cause substantial financial harm to the employee. Accordingly, the employer may have to fund a portion of what the employee should have contributed. Plus, the employer not only has to fund the employer’s match but also any lost earnings on those contributions.
It is possible to prevent this error from occurring. Employers should establish a system of controls to ensure that all eligible employees can elect to participate in the plan. In order to ensure prompt application of all requested changes, it is important for employers to actively monitor employee elections. All individuals administering the program must know the plan document’s provisions. They must become familiar with the Summary Plan Description (SPD). Every employee must receive a copy of the SPD. It is crucial to review SPD at every enrollment meeting.
A simple, effective practice is to annually require all employees to complete a simple three question form that confirms their retirement plan choices. You can download the form here: Retirement Plan Excellence Kit.
Late remittance of plan contributions
Employers must ensure timely contributions to the retirement plan and make it easy to manage. Late remittance of plan contributions is a common mistake. Remittance time frames for retirement funds vary based on company processes and regulator-set maximums.
Employers need a remittance policy defining their feasible definition and max days for plan contributions. Have a backup person for making contributions if the responsible employee is absent. If remittances are late, corrective action may be necessary.
Excess plan contributions
The IRS establishes the maximum contributions employees can make to their retirement plan each year. Excess plan contributions can occur when an individual exceeds the maximum contribution allowable to a 401(k) plan. It’s essential to keep an eye on the contribution limits for your payroll system, even if there are pre-set parameters in place. This process will help you avoid any mistakes or errors.
Plans undergo annual tests to ensure fair distribution among employees. If these tests fail, highly compensated employees may need to have a portion of their contributions refunded to get the plan back in compliance. Usually, the plan’s third-party administrator conducts nondiscrimination tests on a yearly basis. Implementing a safe harbor plan can help avoid discrimination tests altogether.
Another common mistake in administering a retirement plan is the misapplication of the plan’s definition of eligible compensation. Payroll errors can lead to costly corrections and noncompliance for employers. Compensation definitions of plans can differ.
Employers should ensure plan administrators are familiar with plan provisions to avoid mistakes. It is essential to have a control system in place to ensure the accurate application of the plan’s definition of eligible compensation.
Who is responsible for employer retirement plan mistakes?
When a retirement plan fails to operate correctly, who is responsible? Plan sponsors are often surprised to learn that they are responsible! Plan sponsors may think their recordkeeper is responsible for fixing mistakes, but they are actually the legal plan administrator. However, plan recordkeeping agreements contain disclaimers that the recordkeeper is not performing services as a fiduciary, which means they are not assuming the legal responsibilities of a plan administrator as defined in the Employee Retirement Income Security Act (ERISA).
ERISA requires that every plan has a legal administrator and designates the plan sponsor as the default administrator when no other person has been appointed. Accordingly, the agreement doesn’t make the recordkeeper the fiduciary plan administrator. Plan sponsors are liable for recordkeeper errors, even if they followed instructions or were unaware of the actions taken.
There are options available to busy company fiduciaries who want to ensure their plans are run correctly. They can hire professional administrators to reduce many of the legal responsibilities of plan administration. Professional administrators are referred to as 3(16) administrators after the section of ERISA that defines plan administrators. Business owners can choose between professional administration services for a single employer or Pooled Employer Plan (PEP).
A PEP is a new plan created by the Setting Every Community Up for Retirement Enhancement (SECURE) Act that covers unrelated employers operated by a Pooled Plan Provider. 3(16) administrators support and guide each plan to keep it in compliance with all relevant regulations. Whether the plan is for a single employer or multiple employers like a PEP, the administration services help ensure that all participants receive accurate and timely information while supporting plan design, implementation, and ongoing maintenance. A financial advisor can be a good resource to decide if a PEP is a SMART choice for your company.
How to avoid retirement plan mistakes
- Employers should monitor retirement plan operations and understand plan document provisions to prevent errors.
- Employers can hire professional administrators, known as 3(16) administrators, to handle plan administration. They can work for a single employer plan or a Pooled Employer Plan (PEP).
- Employers need a remittance policy and a backup for remitting payments to the retirement plan.
- You can get two invaluable resources to streamline contributions, ensure compliance, and empower employees’ financial future. Download the Retirement Plan Excellence Kit.
Retirement plan mistakes can be costly for employers and employees. Employers can avoid these mistakes by ensuring that they have a system of controls in place to monitor the plan’s operations and that all individuals in charge of administering the program are aware of the provisions within the plan document. Hiring professional administrators to oversee the legal responsibilities of plan administration can also help employers avoid retirement plan mistakes. By taking proactive steps, employers can ensure that their retirement plans run smoothly and benefit their employees.