In 2021, the Employee Benefits Security Administration (EBSA) collected $1.9 billion in qualified retirement plan violations and other enforcement actions. (1) As such, it’s more important than ever that plan sponsors are up to date on plan requirements and avoid costly mistakes. In our first article, we talked about the top four mistakes that retirement plan sponsors often make. In this article, we’ll continue the conversation with mistakes 5-8 and what you can do to avoid them.
5. Inconsistent Remittances of Employee Deferrals
Like most aspects of a qualified plan, there are many rules and regulations regarding how and when employee deferrals should be deposited into the plan’s trust account. Plans with fewer than 100 participants have seven days to make the remittance, while large plans are expected to deposit the funds as soon as possible after payroll (typically within two days).
Due to the different timelines for remittance, many plan sponsors don’t realize the importance of consistent employee deposits. Whichever remittance time frame applies to your plan, it’s critical that the same turnaround time is used consistently for every deferral. Taking seven days to deposit some employee deferrals, but only one day for others is the quickest way to be flagged by the DOL for an audit. It may not even be a large amount of money in question, but if you’re ordered to correct the mistake, it could result in fines, penalties, and manpower that significantly increases the cost.
It’s crucial to coordinate employee deferrals with both payroll personnel and plan sponsors to ensure remittances are both timely and compliant.
6. Not Tracking Loan and Hardship Repayments
When it comes to loans and hardship provisions, there are several common mistakes made by plan sponsors
- Loans made that exceed the maximum dollar amount permitted
- Use of the incorrect loan repayment schedule
- Miscalculating interest owed
- Mishandling loan default by a participant
- Not tracking loan and hardship repayments
Though plan sponsors should try to avoid all these mistakes, not tracking loan and hardship repayments is hands down the biggest one on the list. This is because you are required to act as a fiduciary to the plan participants. If you’re receiving money as repayment for a loan or hardship withdrawal and not properly accounting for it, potentially overcharging the participant, or not investing the correct amount back into their plan, you will be considered in direct violation of the fiduciary responsibility.
Be sure you have a clear understanding of who owes what and how repayments are treated before approving loan and hardship withdrawals.
7. Process, Process, Process
In the midst of all the decisions that have to be made as a qualified retirement plan sponsor, sometimes it’s hard to stay organized or nail down a specific process for how things should be handled. This is a big mistake that plan sponsors should try to avoid at all costs.
As a fiduciary in charge of handling your employees’ hard-earned retirement assets, the Department of Labor wants to see that you are operating like a well-oiled machine, with a defined process for:
- Organization
- Formalization
- Implementation
- Monitoring
As mentioned in our previous article, qualified plans typically start out very organized in order to meet all the requirements to be adopted in the first place. But this can quickly fall by the wayside as more plan participants are added or changes are made to the plan structure.
The DOL doesn’t expect you to be perfect in how you manage the funds entrusted to you, but you have to maintain a cohesive process so that your reasoning for important decisions like investment choices is clearly identifiable and easy to follow. Not only does this protect you as a plan sponsor in case of an audit, but it also protects the plan participants by reducing your odds of making a mistake.
8. Not Having Enough Insurance Coverage
And lastly, a mistake we see quite often is plan sponsors not having enough insurance coverage in the fidelity surety bond required by ERISA. The plan’s fidelity bond must cover at least 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. Many plan sponsors will insure for the correct amount when the plan is first adopted but fail to update the coverage as the plan assets grow. For instance, if the plan assets grow from $1 million to $5 million, the fidelity bond must be updated to maintain compliance. Yet many plan sponsors will keep the same $100,000 coverage no matter how the plan assets are valued.
This is a huge mistake because the fidelity bond is meant to protect the plan against losses. Not having enough coverage can result in costly fines and penalties for the plan sponsors or even financial instability for the plan trust itself. Avoid this mistake by keeping track of your plan’s assets and updating your insurance coverage as needed to maintain compliance.
Protect Your Plan From These Mistakes
Designing and administering an employer sponsored retirement plan is hard. Don’t let these common mistakes make it harder. If you’re a plan sponsor with questions about your responsibilities, click here to learn more about how we can help.
About Greg
Greg Farrall is CEO and owner of Farrall Wealth, an independent, boutique wealth management firm that is dedicated to helping women and business owners create customized financial plans that allow them to grow, protect, preserve, and distribute their wealth. Greg is known for being a problem-solver who walks his clients through whatever life throws at them. He prioritizes building long-term relationships and is passionate about going the extra mile for his clients so they can pursue their goals and live the lives they want. Greg has a bachelor’s degree in international business from the University of Wollongong in Australia and a bachelor’s degree in finance and marketing from Indiana University Bloomington. He is a Professional Plan Consultant® (PPC®) and a Certified Wealth Strategist® (CWS®) professional. And he recently received his Certified Plan Fiduciary Advisor (CPFA®) designation. You can listen to him on his financial literacy and business topic podcast, Money Matters with Greg, on iTunes, Google and Spotify. He’s also on YouTube, Twitter, and Facebook at @FarrallWealth.
Greg is a pillar of his community and served as the 2013-14 co-chair for the United Way campaign, through which he helped raise $1.8 million for 38 nonprofit organizations across Porter County, Indiana. He also served as president of the Valparaiso Rotary Club. Currently, he is on the advisory board for the Kelley School of Business and Dean of Students’ board at Indiana University. He also holds a position on the Culver Academies parents’ board.
When he is not working, you can find Greg spending time with his family or investing in one of his many passions, which include cooking, Spartan races, fly fishing, and meditation. To learn more about Greg, connect with him on LinkedIn.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. This information was developed as a general guide to educate plan sponsors, but is not intended authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in complinace with ERISA regulations.
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