Over the past 25 years, 401(k) plans have become the dominant retirement planning option for most US workers. As a small or medium-sized business owner, you’re probably aware of some of the major complications which can be associated with administering a plan. But what about those so-called “little” issues that can become major problems? According to The National Association of Plan Advisors, here are 5 seemingly “little” things that can create a huge headache (and are actually more common than you think).
1. Not making deposits in a timely manner.
The legal requirement states that contributions must be deposited as soon as reasonably possible (this is the earliest date that funds can be segregated from employer’s general assets), but no later than the 15th of the month. However, this does not mean that a company can routinely wait until the 15th of each month to deposit the funds. The Department of Labor’s Safe Harbor Timeline for plans with less than 100 participants is the 7th business day following the date the contributions would have otherwise been payable to the employee.
2. Failing to provide required notices to participants
Administering a plan means meeting your fiduciary responsibility. This includes (but is not limited to) providing required notifications to participants about safe harbor, QDIAs, automatic enrollment, referral opt-outs and so on.
3. Failing to get spousal consent
The spousal protection law is federal and applies when a spouse wants to make a change to the beneficiary. The Retirement Equity Act of 1984 was enacted so that one member of a married couple could not sign away survivor benefits for the other. Issues nowadays often arise when an HR department accidently misclassifies a participant as not married. Failure to file the proper spousal consent paperwork could cause the plan to lose its tax-qualified status.
4. Paying non-eligible expenses from plan assets
Obviously abiding by plan document criteria for payments is the first step to knowing what’s eligible and what’s not. If the plan does not permit the plan to pay an expense then it’s off limits. But what about those expenses that you are not 100% clear? Settlor functions such as design, establishment and termination of a plan must be employer paid since these benefit the employer rather than the participants. If the expense relates to the implementation, operation, or administration of the plan, it can be paid by the plan because these activities are fiduciary.
5. Not relying on experts to ensure fiduciary responsibility when you lack the expertise
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law not to be taken lightly and is often referred to one of the highest duties known to law. A fiduciary duty is a legal duty to act solely in another party’s interest. As defined, 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.” Hence, if you feel that you lack the skill, prudence and diligence of an expert in such matters, you are expected and encouraged to get help by the nature of fiduciary responsibility.