Monday, April 22, 2024

Who Is The Plan Sponsor Of A 401k

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Executing Or Overseeing Daily Activities Including Determining Eligibility And Handling Enrollments

Plan Sponsor Discusses Complexity of Running a 401k Plan

All new hires must be assessed for eligibility in the 401 plan. When individuals are eligible to participate, they must be notified before enrollment takes effect. Failure to enroll participants on-time can result in the employer having to make a corrective contribution equal to 50% of their missed deferral opportunity.

Maintaining The Plan Records For Tax Time And Overseeing Annual Plan Audits Looking For Red Flags

Large plan audits are required for all 401 plans with more than 100 participants. Auditors will look for red flags while pulling reports, assessing documents, and speaking with IRS auditors. While this may seem like a lot of work , it is necessary to avoid even costlier corrections and financial penalties.

Sharing Fiduciary Responsibility With A 3 Investment Advisor

ERISA 3 also defines whos a plan fiduciary. Specifically, §3 says that a person or entity that renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan is a fiduciary to the plan. The 3 investment advisor uses its skill and prudence in institutional investing to make recommendations to the plans trustee or Named Fiduciary, who then makes the final investment selections for the plan.

Essentially, a 3 is a helper, not a decision maker, and is considered a co-fiduciary with the trustee or Named Fiduciary. This type of relationship works best for a plan sponsor that still wants final authority over choosing the plans investment lineup. Ultimately, it’s important for plan sponsors to understand whos responsible for selecting a 401 plans investment line upand to choose an investment service provider that best matches the sponsors goals.

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Internal Revenue Code Liability

An employer may also develop liabilities related to the plan under the Internal Revenue Code. The requirements for a 401 plan under the code range from technical testing mandates, such as not discriminating in favor of those employees considered to be “highly compensated,” to failures to follow the terms of the plan document. The latter failure is the easiest to remedy through periodic plan audits.

If an employer finds a mistake during a self-audit of a plan, mistakes may be eligible to be corrected under the IRS Employee Plans Compliance Resolution System . Such errors, if later picked up during an IRS audit, could expose the employer to monetary penalties, in addition to related legal fees.

Generally, the nondiscrimination tests applicable to 401 plans are the minimum coverage test, the actual deferral percentage test, the actual contribution percentage test and the top-heavy test.

If nondiscrimination tests are not satisfied, a correction must be made. For instance, where a plan fails to pass the ADP or ACP test, one correction under the IRS EPCRS requires the plan sponsor to make a contribution to the plan to raise the average contribution by a “non-highly compensated employee” by the end of the plan year following the plan year in which the test is failed.

Highlight : Retirement Readiness And Plan Design Through The Pandemic And Beyond

Why Sponsor A 401(k)

Sponsors are increasingly focused on their retirement plans meeting employee needs. Whether that means making changes to plan design or increasing employee education there are ways to help participants achieve retirement success.

Find out how sponsors are doing in preparing employees for retirement and how the pandemic affected these efforts.

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Fees For 401 Services: What Plan Sponsors Need To Know

Political candidates who dont know the cost of a gallon of gas or a movie ticket usually wind up paying that price with voters and losing on election day. Likewise, many plan sponsors are finding themselves on the losing side of lawsuits because they allowed their defined contribution plan to pay unreasonable service fees.

Plaintiffs class action lawsuits against excessive fees dominated Employee Retirement Income Security Act litigation in 2017, according to Seyfarth Shaws annual Workplace Class Action Litigation Report. Of the $2.72 billion spent by employers on the top 10 aggregate workplace class action settlements, nearly $928 million came from the 10 largest ERISA settlements. That is up from $807 million in 2016.

Seyfarth Shaw expects more of these lawsuits to come in 2018. That is bad news for many employers because defending and settling lawsuits can significantly affect an organizations bottom line. For example, in a case settled in May, plaintiffs alleged that Philips North America LLC paid too much for its investment management and administrative services. While the company said in court documents that it did nothing wrong, a U.S. District Court preliminarily approved a $17 million payment to participants in its 401 plan.

Knowing your Fees

According to NEPC, the median plan record keeping fee for 2017 was $59 per participant, compared to $64 in 2015. The median investment fee ratio was 0.41 percent, compared to 0.46 in 2015.

How Fees Affect Participants

Terminating A 401 Plan

401 plans must be established with the intention of being continued indefinitely. However, business needs may require that employers terminate their 401 plans. For example, you may want to establish another type of retirement plan instead of the 401 plan.

Typically, the process of terminating a 401 plan includes amending the plan document, distributing all assets, and filing a final Form 5500. You must also notify your employees that the plan will be discontinued. Check with your plans financial institution or a retirement plan professional to see what further action is necessary to terminate your 401 plan.

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Things All 401 Plan Sponsors Share No Matter The Size Of The Firm


Retirement plans come in all shapes and sizes. You may think your plan is too big to share the same concerns with smaller plans. It turns out, however, theres a lot in common between really large and really little 401 plans.

This is not to say there arent differences between big and small companies when it comes to their 401 plans. For one thing, smaller companies dont have the same staffing capacity. This puts a squeeze on their ability to address critical matters as ERISA places similar requirements on all plans, no matter what their size.

So, yes, small company sponsored plans do have a substantial issue that their larger brethren do not. They are not able to spend the appropriate amount of time on the plan given their limited resources, says Preston Traverse, Partner-Mid Market Solutions Leader at Mercer in Boston.

While you dont want to understate this difference, it becomes more significant when you realize the Department of Labor wont necessarily give them a pass just because theyre short-handed. It is therefore all the more important to understand how large and small 401 plans overlap.

Here are three critical concerns all 401 plan sponsors have:

Fiduciary Duties and Liability

Costs & Fees

Still, on the margin, costs and fees remain an issue for both large and small plans, if only on a relative basis rather than an absolute one.

Education & Communication

Indeed, a survey from Lincoln Financial Group

Establishing A 401 Plan

What Plan Sponsors Can Do to Plug 401k Leakage

When you establish a 401 plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institutionsuch as a bank, mutual fund provider, or insurance companyto help with establishing and maintaining the plan. In addition, there are four initial steps for setting up a 401 plan:

  • Adopt a written plan document,
  • Arrange a trust for the plans assets,
  • Develop a recordkeeping system, and
  • Provide plan information to employees eligible to participate.

Adopt a written plan documentPlans begin with a that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide the document. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you will be bound by the terms of the plan document.

Once you have decided on a 401 plan, you will need to choose the type of 401 plan that is best for youa traditional 401 plan, a safe harbor 401 plan, or an automatic enrollment 401 plan. In all of these plans, participants can make contributions through salary deductions.

An automatic enrollment 401 plan allows you to automatically enroll employees and place deductions from their salaries in certain default investments, unless the employee elects otherwise. This is an effective way for many employers to increase participation in their 401 plans.

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Do You Know Another Plan Sponsor Who Needs A Comprehensive Plan

HomeBlogDo You Know Another Plan Sponsor Who Needs a Comprehensive Plan?

You know the importance of providing a retirement plan for your valued employees, but you are also familiar with the complicated legalities and stress that managing such a plan can bring. Thats why youve delegated these challenges to PlanPILOT, so you can focus on doing what you do best: managing your business, equipping your employees, and providing a service or product that makes a difference.

As a leader in your organization, its likely you know others who are in the same spot you once wereoverwhelmed with the responsibilities of being a plan sponsor. Did you know that PlanPILOT is accepting referrals? As a retirement plan consulting firm, we solely serve retirement plan sponsors and their participants. Heres how we can help the plan sponsors you know.

Delegating Fiduciary Responsibility To A 3 Investment Manager

A plan may delegate fiduciary responsibility for plan investments from the plans trustee or Named Fiduciary to an ERISA 3 investment manager. A 3 Investment Manager is a registered investment adviser, bank, or insurance company that meets certain qualification standards and has acknowledged in writing that it is a fiduciary to the plan.

Once a 3 investment manager is appointed in writing, it has the power to manage, acquire, or dispose of any plan asset. This means the 3 investment manager assumes sole fiduciary responsibility for investment selection and monitoring, relieving the trustee and Named Fiduciary of almost all fiduciary responsibility for investments. The trustee and/or Named Fiduciary is still responsible for oversight, meaning prudently selecting and monitoring the 3 investment manager, taking into account its qualifications, and other relevant factors.

Plan sponsors who do not want to play an active role in selecting plan investments, either from a risk tolerance perspective or due to a lack of experience, are often advised to hire a 3 investment manager.

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Plan Sponsor Versus Plan Administrator

Its important to understand your role as a plan sponsor or administrator. A plan sponsor is any company, union or other institution that sets up a retirement plan, such as a 401 or 403, for the benefit of the organizations employees, while more strictly speaking, a plan administrator is responsible for directing and planning the day-to-day operations and the strategic decisions involved with a groups retirement plan. ERISA requires that the plan sponsor formally identify someone as plan administrator or the named fiduciary acting on behalf of the plan sponsor.

In other words, a plan sponsor is the designated employer responsible for all stages of designing, implementing, amending and terminating the group plan, while the plan administrator oversees its functioning. One major difference between a sponsor and administrator is that plan administration is often outsourced to another individual or firm with more specialized investment or management expertise. While the plan sponsor can never eliminate its fiduciary responsibilities, it can outsource them to co-fiduciaries as plan administrator under ERISA Section 3 and investment advisor under 3 or 3 .

However, the same party may serve as both plan administrator and plan sponsor. Under these circumstances, the plan sponsor has additional fiduciary responsibilities, meaning they hold higher professional standards of duty.

Communicate With Your Plan Service Provider

401k Plan Sponsor Guide

Communicate frequently with your plan service provider and/or payroll department for:

  • New hires, re-hires, terminations and compensation changes
  • Accurate payroll compensation amounts for each participant
  • Census data for determining plan eligibility and benefit payments
  • Data necessary to accurately identify highly compensated employees
  • Plan terms for defining employee contributions, plan payments and loans
  • Any plan amendments, for example, changes to the plans:
  • definition of compensation
  • contribution or allocation formulas

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Should You Use A Third

In order to simplify the management of a 401, many businesses appoint a 3 plan administrator. As the IRS notes, this move does shift some of the fiduciary responsibility away from the sponsor. However, hiring someone to perform fiduciary functions is itself a fiduciary act, and does not absolve your business of fiduciary responsibility.

In other words, a sponsor can never totally abdicate their role as a fiduciary. The ultimate responsibility for the plan lies with the plan sponsor, regardless of whether another fiduciary is appointed. So choose who you work with carefully.

Managing a 401 is a significant responsibility its about the future security and comfort of your loyal employees, after all. But just because its a big responsibility doesnt mean it has to be a big burden. Check out our checklist for 401 providers to see what third party providers can do for you and how to pick one that makes sense for your business .

What Is An Erisa Fiduciary

Before we identify a plans fiduciaries, we must first explain what it means to be an ERISA fiduciary. The Employee Retirement Income Security Act is the federal law that controls most aspects of retirement plans .

ERISA includes a set of standards , often referred to as ERISA fiduciary duties. The primary ERISA fiduciary duty is to run the plan solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and paying plan expenses.

This deceptively simple sentence breaks out into many parts and means plan fiduciaries must:

  • Act prudently

  • Diversify the plan’s investments in order to minimize the risk of large losses

  • Follow the terms of plan documents

  • Manage plan expenses

  • Avoid conflicts of interest

  • When acting in a fiduciary role, plan fiduciaries cannot put their own interests above their plan participants and must always consider whats best for the plans participants. ERISA has specific rules that identify whos wearing a fiduciary hat and when they are wearing it.

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    Understanding Retirement Plan Sponsors Responsibilities

    HomeBlogUnderstanding Retirement Plan Sponsors Responsibilities

    One of the most crucial tasks for modern human resources professionals is providing an attractive benefits package to employees. Retirement savings, pensions and health plans provide enormous value to existing workers and prospective talent, but administering these benefits also comes with strong administrative and even regulatory challenges. Organizations that decide to act as retirement plan sponsors and offer such plans have several key responsibilities to keep in mind.

    Who Can Be A 401 Plan Sponsor

    A Plan Sponsor’s Perspective of an ETF 401k Platform

    In addition to the owner of the company, the plan sponsor can also be a union, a group of representatives, or a key executive. Often, a plan sponsor is also referred to as a fiduciary a person who takes legal responsibility for making decisions on behalf of plan participants. Fiduciaries agree to avoid conflicts of interest and work to keep fees reasonable. The fiduciary can also be held personally liable for plan losses caused by mismanagement.

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    Ensure Prudent Investment Options

    A prudent investment is one that makes sense for your Plan Participants without costing an arm and a leg in fees. Today, most excessive 401 fee lawsuits can be traced back to hidden fees buried in plan investments. The thing is, its nearly impossible to prudently select investments when you arent sure what fees youre paying.

    Unfortunately, many service providers provide a rather opaque picture of investments. You may receive conflicting advice that leads to excessive fees and poor investment returns for your participants. As a result, you fail to meet your Fiduciary responsibility and place yourself at risk for Fiduciary liability.

    How To Track Down A Former 401 Plan Administrator

    You might have money you dont even know about coming to you out of an old 401 plan. You can look at old tax W2s filed with the IRS and check Box 12 to see if you made any contributions. You can also contact a former employer with your name, social security number, and dates of employment to see if they have the records you need.

    Mergers, relocations, changes in providers, and bankruptcies can complicate matters, but a prior Form 5500 can help you locate the firm. The National Registry might list your name as a missing participant, helping you connect with a forgotten employee retirement account, or you may check the Department of Labors Abandoned Plan Database.

    Ubiquity is a small business 401 plan administrator who can help with all these duties. Contact us for details.

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    Difference Between A 401 Plan Sponsor And Plan Administrator

    The administrator of a 401 plan has a fiduciary duty to handle the money in the plan with the utmost care and diligence and operate the plan in a manner that is solely in the best interests of the plan participants, regardless of all other factors or circumstances.

    The plan sponsor may also be named a fiduciary if it elects to administer the plan itself.

    Contributing To Your 401 Retirement Plan


    Contributing to a 401 plan is traditionally done through ones employer.

    Typically, the employer will automatically enroll you in a 401 that you may contribute to at your discretion.

    If you are self-employed, you may enroll in a 401 plan through an online broker, such as TD Ameritrade.

    If your employer offers both types of 401 accounts, then you will most likely be able to contribute to either or both at your discretion.

    To reiterate, with a traditional 401, making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn.

    With a Roth 401, your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them.

    Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire.

    If you expect to be in a lower tax bracket upon retirement, then a traditional 401 may help you more in the long term.

    You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket.

    On the other hand, a Roth 401 may be more advantageous if you expect the opposite to be true.

    In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up.

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