servicing strategies | PLANADVISER May/June 2017

Avoidance Strategies

How advisers can help sponsors steer clear of common plan errors

By Judy Ward | May/June 2017
Art by Rachel Jablonski

Plan sponsors sometimes get complacent and put their plans on autopilot operationally, says Lisa Tavares, a Washington, D.C.-based partner at law firm Venable LLP. So a disconnect may exist between a plan’s operations and what the plan document says, as well as what federal regulations require. That can lead to operational mistakes.

Sponsors run a risk when they remain oblivious to operational errors, Tavares says, and it is worth investing the time and effort in fixes—and, better yet, taking steps to prevent future errors. “Primarily, the incentive for sponsors is to make sure the plan is in compliance, before the IRS [Internal Revenue Service] or DOL [Department of Labor] gets to them, so the sponsor can mitigate any fines or penalties for the errors,” she says.

Preventing Four Typical Mistakes
The areas in which these mistakes generally occur fall outside the scope of retirement plan advisers’ typical role. Yet, being aware of your clients’ potential pain points can help keep from becoming real. Sources talked about four frequent errors and how to help sponsors prevent them:

• Late deferral deposits. Employers can find this tricky, as the DOL has no hard-and-fast rule saying they need to transfer their workers’ deferral money to their plan provider in X number of days, says Kimberly Moore, a partner at Summit CPA [Certified Public Accountant] Group—a firm that does retirement plan audits—in Fort Wayne, Indiana.

“What the DOL says is that, as soon as an employer can segregate that money from its payroll and get it to the plan’s provider, that is the employer’s timing,” she says. For small companies that do a single payroll run each pay period, that can mean one day. For a large company doing multiple payroll runs, that may take five to 10 days.

Where a problem arises is when no one at an employer understands the DOL requirement, or when the payroll staff member who does understand leaves the company. “I find that [often] in first-year plan audits or with a new client,” says Christopher Ciminera, manager—accounting and auditing, at Belfint, Lyons & Shuman, also a CPA firm that performs retirement plan audits, in Wilmington, Delaware.

The DOL wants to see an administrative pattern for contribution remittances, he says, adding that each employer needs to figure out when it can reasonably transfer the money. “If an employer can remit the withholding by the day following each payroll run, that is when an employer needs to do it,” he says. “Then, the employer needs to stick with that schedule.”

• Incorrect compensation definition. The plan document spells out what is and is not included in the definition of compensation utilized to calculate participant deferrals and the employer match for a plan. “Usually someone pretty high up in a company worked with the provider to get the plan document ironed out,” Moore says. “But that information may not have filtered down to the person handling payroll at the employer.” So, for example, a plan document may stipulate that any bonuses paid to employees get included in the compensation number utilized to calculate their deferral and match, but the payroll system is not set up to do calculations that way.

To avoid this type of problem, a plan sponsor should first review and understand the definition of compensation found in the plan document, Tavares says. Then, the employer should make sure that the document’s definition lines up with the payroll system’s calculation methodology. “Unless an employer makes a change to its payroll system or the plan, that review can be done every two years,” she says.

• Eligibility snafus. A plan document defines the conditions by which an employee becomes eligible for the 401(k) plan, but, in a plan’s ongoing operations, that rule is not always adhered to. “That’s one we see frequently on plan audits,” Ciminera says.

A relatively new employee may cross the threshold of having worked enough hours to be eligible for enrollment but not get offered that option, for instance. “It might be an issue of someone not understanding the rules in the plan document on eligible and ineligible employees,” he says. “Employers should make sure that the HR [human resources] department or payroll department—whoever is tracking employees—knows exactly when each new employee will become eligible to enter the plan,” he says. “Review that definition, identify and track those employees, and communicate to them when they become eligible to enter the plan.”

Sponsors whose plans automatically enroll employees need to regularly double-check to make sure this actually gets done, Tavares advises. “Quarterly or semi-annually, I suggest that sponsors take the time to check that every eligible employee has been automatically enrolled and no eligible employee was missed,” she says.

• Loan and hardship problems. Loan issues often stem from an employer’s payroll system failing to get the information needed to start up a participant’s loan-repayment schedule in a timely way. Especially at plans that allow participants to have several loans outstanding, human error can come into play, Moore says. “Administratively, allowing multiple loans tends to be very onerous, and then the employer starts making mistakes,” she says.

Sponsors need to collaborate with their third-party administrator (TPA) or recordkeeper to ensure the timeliness of loan-repayment withholdings, Ciminera says. “When a loan is taken, plan sponsors should know when to start the repayment withholding and when to stop the withholding. That is something an employer should keep track of internally, even on a spreadsheet,” he says. “Ultimately, it’s the plan sponsor’s responsibility to make sure it’s done correctly.”

Similarly, with hardship withdrawals, employers may fail to follow all of the federal government’s rules for approving participants’ hardship requests, Moore says. “There are only a limited number of types of requests that can be approved, so the employer needs to make sure it’s a valid request. The employer is supposed to see documentation that verifies the employee’s need for the amount that he or she is requesting,” she says. “So if the money is being requested to pay medical expenses, for example, the employer needs to see copies of the medical bills.”

Broader Preventative Steps
Advisers also can help sponsors take several broader steps to avoid problems:

• Perform operational reviews. Ideally, sponsors should review their plan operations at least annually, Ciminera advises. “Print out the plan document, and do a thorough review of it. Then review all administrative processes the employer has in place to implement the plan provisions,” he says. “And maybe make a chart listing each of those plan-related processes: Who is doing what? And when?”

Sponsors need to regularly evaluate whether all of their plan’s operations match up with what the plan document says the plan does, notes Ken Waineo, senior director, business development and operations at The Standard in Portland, Oregon. “One of the inadvertent sponsor errors we run into relatively often is when they’re not always following the plan document,” he says.

• Create an annual compliance calendar. Every year, an adviser can put together a calendar listing all the tasks a sponsor client must fulfill to meet the regulatory requirements for plan operations. For example, that includes breaking down the steps to filing the plan’s Form 5500, and what needs to happen for nondiscrimination testing to be done on time and with accurate data, Waineo says. “Having a calendar of all the compliance aspects that a sponsor should pay attention to is incredibly important,” he adds.

• Consider hiring a 3(16) fiduciary. Employers often are unaware that they have significant fiduciary risk associated with their administrative duties as a plan sponsor, or that there are potentially sizeable DOL and IRS fines for not fulfilling their duties, Waineo says.

A 3(16) fiduciary—typically a recordkeeper or TPA—can take on some key administrative tasks, as well as fiduciary responsibility for ensuring compliance on these tasks, such as timely contribution remittance. But what services 3(16) providers will and will not do varies widely, Waineo cautions. “That is a place where an adviser can offer a lot of help to employers, because 3(16) providers look very different from each other,” he says.


  • Common errors that retirement plan sponsors make stem from a lack of consistency in following the summary plan document. These errors include: late deferral deposits, incorrect definition of compensation and problems managing loans.

  • To avoid plan errors, advisers can: review the plan document with plan sponsor clients every year, help them adhere to a compliance calendar, and consider where other fiduciary outsourcing may help.