There are many intricacies involved in administering retirement plans. The implementation of sound internal controls is necessitated by the many rules retirement plans are subject to, and by the fact that some of those rules tend to change quite frequently. Because of the complexity of those rules, mistakes (generally human errors) can occur in almost all retirement plans, even plans run by experts.
Even though there are obvious differences between the responsibilities surrounding small and large plans (large plans being those with over 100 participants), there are certain best practices that prudent plan sponsors should be implementing, regardless of their plan size.
One of the first steps a plan sponsor should take is to do an overall review of the following areas:
- Plan documentation,
- Plan officials and fiduciary responsibilities,
- Operational compliance,
- Operational internal controls, and
Plan documents should be organized and easily accessible, and generally should include—
- Executed plan document (adoption agreement for prototype or volume submitter plans);
- Plan amendments executed after the original plan adoption;
- IRS determination or opinion letter for the executed plan document;
- Agreements with service providers, including plan custodian, record keeper, third-party administrators (TPAs), etc.;
- Summary plan description and (if applicable) summaries of material modifications;
- Minutes of meetings of the governance committee;
- Fidelity bond insurance covering plan officials;
- Form 5500 (subject to the six-year retention requirement of ERISA Section 107);
- Audited financial statements (if applicable, also subject to the six-year retention requirement);
- Internal checklists and procedural manuals; and
- Other agreements or important correspondence related to the plan.
Plan officials and fiduciary responsibilities
Fiduciaries and any other individuals (plan sponsor officers, employees, and such) who handle plan assets are generally referred to as plan officials. Fiduciaries control and manage the operation and administration of the plan, including its investments. ERISA requires a retirement plan to have one or more named fiduciaries, one of whom serves as plan administrator.
A fiduciary must be identified as such in the plan document and can be an individual, group of individuals (committee), or the employer discretionary authority or responsibility for the plan administration; exercise discretionary authority or control over plan management or plan assets; and/or provide investment advice.
And while discretion involves judgment and the authority to act in different situations, to act in a fiduciary capacity means that all actions taken must
1) be in the best interest of the plan participants and beneficiaries (not the plan sponsor or management of the company) and 2) be in accordance
with the terms of the plan document and ERISA.
Even if not designated a fiduciary, a person may become an “accidental fiduciary” by taking on discretionary authority over the administration of the plan or management of the plan assets. An important fact to remember is that fiduciaries can be held personally liable for breach of their responsibilities.
Operational compliance and internal controls
Plans must comply with the provisions in the plan document and the applicable ERISA, DOL and IRS rules and regulations. Plan sponsors should be aware of the applicable regulations and implement an effective system of internal controls to ensure proper and timely compliance. Internal controls are most effective when the processes and procedures are documented and the responsible persons identified. Special attention should be paid to high-risk areas. To ensure compliance plan sponsors should—
- Review plan eligibility provisions and make sure actual practices follow the plan provisions;
- Review the plan’s definition of compensation and make sure the payroll system setup uses the proper compensation;
- Be aware of the parties in interest with regards to the plan (usually the plan sponsor, fiduciaries or employees of the plan, or any person who provides services to the plan);
- Monitor the timeliness of the remittance of employee contributions and loan payments;
- Regularly review participant data provided to the TPA;
- Monitor participant loans (if participant loans are allowed by the plan document) including maximum loan amount limits, proper loan documentation and proper identification and treatment of defaulted loans;
- Monitor distributions and make sure proper approvals and support are maintained; pay special attention to compliance with plan provisions regarding hardship distributions and small balance cash outs);
- Review administrative fees being charged to the plan for reasonableness;
- Make sure all required plan tests, filings, and documents are completed by the required deadlines, e.g. year-end compliance tests (non-discrimination, and such.); required disclosures to plan participants; Form 5500; and
- Review the plan participant count annually to comply with the audit requirement for large plans (more than 100 participants).
Plan officials should be aware of their rights and obligations with regards to plan reporting. Reporting under the plan generally includes reporting by the plan TPA, custodian or trustee and reporting for which the plan sponsor is responsible.
- The TPA (the trustee or custodian if no TPA exists) prepares reports in the form of monthly and/or quarterly and annual statements detailing the plan balances and transactions for the plan sponsor and participants;
- Both small and large plans file Form 5500 with the IRS (due seven months after the plan’s fiscal year end); and
- Large plans are required to attach audited financial statements to the Form 5500 when filed.
Administering a retirement plan is not the same as simply knowing the applicable regulations and fiduciary responsibilities. It is much more than that. Retirement plan administration encompasses the structure of plan officials, the plan operation processes, the operational compliance and system of internal controls and management of the plan assets in accordance with the plan terms, ERISA regulations, and DOL and IRS rules.
One of the most important things plan sponsors can do to minimize the risk of non-compliance and costly errors is to implement a good system of plan administrative policies and procedures, and to provide continuous oversight.