Advice That’s on the Money 401(k) Plans Require Investments — in Time and Energy

O

ffering a 401(k) or 403(b) plan at your practice is often necessary to attract and retain talented physicians and healthcare professionals. However, the responsibilities that come with offering such a plan can sometimes be overlooked.

It’s important to revisit these responsibilities on a regular basis to ensure that you are in compliance with the Department of Labor (DOL) rules and regulations. Today, this goes beyond simply having a plan document, because the rules governing these plans have been updated by the DOL, Internal Revenue Service, and Employee Retirement Income Security Act.

Below are a few best-practice recommendations to ensure the plan is being properly administered and monitored. These items should be reviewed on an annual basis. Since many transactions are now done electronically, the plan sponsor is often out of the loop on certain activities, which can make monitoring the plan more difficult than when all transactions were still processed with paper.

• If it has been a while since your plan document was updated, review it not only to make sure it is properly updated for all current regulations, but also to ensure that the way you are administrating the plan agrees with the plan document.  For example, if the plan requires the same deferral on bonuses as regular wages, is this being performed when bonuses are paid?

• Have a formal committee, one that meets on a regular basis, not only discuss how the investments performed, but also review any new participant loans, contributions, distributions, and even fees charged. Does everything look reasonable and proper given your expectations? Keep minutes of these meetings to document not only that you met, but what was discussed.

• Know who your fiduciary is. On its website, the DOL states that the plan must have at least one fiduciary named in the written plan, or through a process described in the plan, as having control over the plan’s operation. Fiduciaries have specific duties and can face monetary fines from the DOL if found not complying with these responsibilities. Is your fiduciary (or fiduciaries) aware of them?

• Make sure the plan has proper fidelity bond coverage. This bond is a type of insurance that covers the plan against losses resulting from acts performed by people covered by the bond.

• Keep personnel files up to date and document your hiring process. Eligibility will vary from plan to plan, but proper documentation is always required to prove an employee’s eligibility into the plan.

• Have a formal process in place to monitor timeliness of the remittance of the employee deferrals. For plans with less than 100 eligible participants, the employer has seven business days from the day payroll is paid to remit employee dollars to the plan. However, for plans with morethan 100 eligible participants, the DOL wants the deferral dollars sent to the plan as soon as possible as well as remitted on a consistent basis; there is no seven-business-day rule.

• Make sure your payroll system is properly coding eligible wages. Each plan document will define eligible wages, so different wages are eligible for deferral for each company. If your plan also offers Roth contributions, it is also important to check if the contribution is being calculated with after-tax dollars. This will have current-year and future-year tax implications. Many companies also rely on the payroll company to calculate the employer match; make sure this is reviewed and periodically recalculated for different participants.

• Monitor participant loan repayments. Loans must be paid within certain time limits, and if you have employees who do not receive a paycheck each week, that can disrupt the payment schedule.

• Obtain necessary information from anyone who has requested a hardship distribution to prove the hardship. Some third-party administrators (TPAs) do not require the participant to send that paperwork to the TPA or to you as the plan sponsor, and there are specific rules covering hardship distributions.

• Review your fee structure with your TPA as well as investment fees related to investments offered to the participants.  Fees are now being disclosed to participants differently, and fiduciaries have a responsibility to ensure fees charged to the plan are reasonable. In fact, on May 18, the Supreme Court noted in Tibble et al v. Edison International et al that, pursuant to trust law, “a trustee has a continuing duty to monitor trust investments and remove imprudent ones.” Participants in the Edison 401(k) Savings Plan sued the plan’s fiduciaries, claiming they suffered losses from alleged breaches of fiduciary responsibilities by the plan offering higher-priced retail-class mutual funds when materially identical, lower-priced institutional-class mutual funds were available. The Supreme Court ruled that, even though the investments were added to the plan past the six-year statutory limit, the trustees of the plan still had the fiduciary responsibility to monitor those investments.

• Speaking of TPAs, if they issue a SOC 1 (Service Organization Controls) Report, review the report and assess for any exceptions noted in the testing. Also, review the user entity controls, because your TPA assumes you are doing certain things on your end to ensure the data they receive is correct. Are you performing all of the user entity controls? These reviews can be documented in your regular committee meetings.

This is list is not meant to be all-inclusive — it’s actually just the beginning of what the DOL likes to see plan sponsors monitoring. These items are important regardless of whether your plan needs an independent audit or not and requires additional time for you and your employees, but don’t be fooled — just because you pay a TPA to administer the plan does not mean you are completely relieved of responsibility to monitor the plan and its activities.  Just a small amount of time invested now can save you time and prevent problems later. v