Failed Testing an Opportunity for Retirement Plan Advisers

These plans were required to return $820 million in 401(k) contributions to highly compensated employees, resulting in increased income taxes and lower retirement savings for the impacted participants.

“The issuance of corrective distributions should serve as a red flag to financial advisers who are looking for opportunities to increase their 401(k) business,” says Eric Ryles, managing director of ALM Financial Intelligence. “It means that the plan has highly compensated employees who were unable to save as much for their retirements with pre-tax income as they would like. It may also mean that the plan is not designed to encourage workers to contribute sufficiently.  Plan advisers can utilize this information in their prospecting efforts by introducing retirement education programs and suggesting better 401(k) savings incentives as a part of their proposal.” (See “How to Help a Plan with a Nondiscrimination Fail”)

The IRS found plans that issue corrective distributions commonly have other issues, Judy Diamond notes. These may include inadequate fidelity bonds, incorrect calculation of vesting schedules or failure to amend plans in a timely period to conform to current laws and regulatory changes.

Judy Diamond Associates based this research on the most recently available complete set of 401(k) plan disclosure documents released by the Department of Labor (date), which are available in its Retirement Plan Prospector database.