Four 401(k) Plan Administration Best Practices

Nov 04

The cornerstone of effective plan administration is the plan document, which stipulates how Fiduciaries will handle the administrative features of the plan.

All Qualified retirement plans must satisfy complex coverage and nondiscrimination testing requirements to qualify for the special tax treatment afforded to these plans under the Internal Revenue Code. In addition, most plans that permit employee elective deferrals must satisfy a special nondiscrimination test designed.  This test is to ensure that highly compensated employees are not permitted to contribute disproportionally to the plan compared to non-highly compensated employees.

If highly compensated employees make contributions at a significantly higher rate, the plan must refund their contributions, make additional contributions on behalf of the other employees, or risk losing the plan’s status as a tax-qualified retirement plan.

Alternative Options for Testing Issues

Plan Fiduciaries who face testing issues can pursue alternative approaches that will lead to better retirement outcomes for plan participants instead of capping the highly paid, including;

  • Automatic plan design strategies, such as automatic enrollment and automatic increases to raise participation savings rates among the non-highly paid.
  • Safe-harbor plan design where in exchange for meeting certain contributions, vesting distributions and notice requirements, a plan sponsor can avoid the requirements of nondiscrimination testing
  • Targeted education programs to boost participation among non-highly paid.

Plan Partnership Benefits

One of the benefits with our partnership at Vanguard is their strong presence in Washington DC, in which clients can rely on our legislative and regulatory updates, including our regulatory briefs, Strategic Retirement Consulting bulletins, webcasts, and videos.  These resources identify strategies to help plan sponsors respond to legal and regulatory changes.

Another benefit with our Vanguard partnership is an independent accounting firm audits Vanguard’s internal controls of their recordkeeping systems annually.  The Service Organization Control 1 (SOC 1) report is prepared according to the American Institute of Certified Public Accounts (AICPA).

The report, provided to plan sponsors annually, offers a description of the controls designed for achieving the control objectives and ensuring the effectiveness of those controls operations that are most likely relevant to the plan financials.

An independent audit firm is also engaged to evaluate Vanguard’s security controls against Trust Services Principles published by the AICPA.  The results of this evaluation and a description of their Information Security Program are published in a Service Organization Control Report (SOC 2) and available to plan sponsors.

Plan Administration Best Practices

Here are several Plan Administration best practices that we have identified and put into place with our clients:

  1. Ensure that the administration of the plan conforms to the written plan document and any administrative policies and procedures for the plan.
  2. Maintain an up to date plan document and conduct a periods compliance review
  3. Comply with nondiscrimination testing and other compliance rules.
  4. Ensure the timely investment of employee contributions, recognize the importance of participants’ notification, and implement a well-defined claims appeal process.

The DOL requires timely remittance of all contributions to the plan’s trust as soon as they can be reasonably segregated from the employer’s assets.  The rule states that employee contributions must reach the trust no later than the 15th business day in the month after the month the contributions were withheld.

The DOL has created a safe harbor period for plans with fewer than 100 participants.  Under the safe harbor, participants’ contributions will be deemed to comply with the law if those amounts are deposited to the trust within seven business after the date the amounts were withheld.

All employers should do everything possible to remit employee contributions as soon as reasonably possible.

Additionally, Fiduciaries should ensure that required annual notices are provided to participants for certain plan designs, including safe harbor plan designs and plans with a QDIA.

Plan administration is just one of many Fiduciary best practices that we cover as part of our employer-sponsored retirement plan series.  We designed this series to help support businesses of any size to help you reduce potential liability and provide a plan that best serves your employees.

Contact us for more information about any of these best practices or to see how we may better support your company and employees with a low-cost, high service employer-sponsored retirement plan.