Employer 401(k) fees
Maintaining a 401(k) plan can be an expensive proposition: fees for recordkeeping, administration, and related services can run into the millions of dollars per year. Consequently, in-house staff have two overarching goals:
- To obtain the contracted-for services at the agreed upon price, and
- To mitigate the risk of unexpected costs and errors.
Benefits teams correctly believe and expect the provider will deliver agreed upon services as outlined in the scope of services and contract and provide accurate billing, thereby mitigating the risk of unexpected costs.
Unfortunately, based on Curcio Webb’s experience, these assumptions are not often actualized. Many providers are faced with changing ownership structures, which places pressure on the providers to deliver growth and profitability, which can adversely affect their level of service. In addition, the change in ownership structure often impact employee morale, engagement and higher than anticipated employee turnover.
These dynamics result in our clients experiencing a higher than usual error rate, which adversely affects the benefits team, employee engagement and the total cost of ownership.
401(k) Plan Operational Failures
What we have observed is what the IRS refers to as “operational failures,” namely, failures to operate the plan consistent with plan documentation. In these situations, the employer is not getting the services promised under the contract and this can lead to considerable unexpected costs. For example, if a 401(k) plan states that all employees are eligible, but some employees are not offered enrollment, this is an operational failure and correcting the failure requires make-up contributions, not from the employees’ pay but from corporate funds (additional compensation).
Operational compliance is a pervasive challenge for employers and while the IRS has voluntary compliance programs, IRS-approved corrections can be expensive, and penalties must be paid.
Ensuring that you are getting what you pay for and reducing the risk of unexpected costs requires a proactive approach and this bulletin provides a general roadmap in relation to three of the most common operational failures.
1. Failure to Follow the Plan Definition of Compensation.
Retirement plans have specific definitions of the compensation used when calculating contributions (“eligible compensation”) and these definitions must be applied accurately and consistently across all participants every pay period. The complexity of these definitions combined with the myriad of wage types typically used by employers and system changes make this a vulnerability for many employers.
Failure to correctly determine eligible compensation often results in contributions that are smaller or larger than they should be using the correct eligible compensation. Either way, this failure often results in unexpected out-of-pocket costs (make-up contributions with earnings paid from corporate assets) and/or over-spending on employer contributions (that might not be recoverable) to say nothing of professional fees, staff time, and erosion of trust that the plan is operated properly for the participants’ best interests.
- Periodically perform self-audits.
- This self-audit should also be done after any significant change to payroll systems, merger of payrolls, plans or businesses.
- Before rolling out a new compensation or benefit program, determine whether the compensation is included/excluded from eligible compensation. Adjust and test payroll systems to ensure correct treatment.
2. Failure to include eligible employees or exclude ineligible employees.
Plans define which employees are and are not eligible for plan participation. Closely related to this are age and service requirements that may apply in addition to whether the person could become eligible and plan entry rules that say when an employee who is eligible can enroll and begin contributing.
Failing to apply eligibility rules correctly can result in employees not being offered enrollment – at all or at the correct time – requiring make-up contributions with earnings (and consider the effect of this in plans with auto-enrollment and auto-escalation) and making sure data is corrected to ensure correct service and vesting. This failure can also result in employees who should not be offered enrollment, being enrolled and receiving employer contributions they really were not entitled to, something that can be surprisingly complicated and disproportionately expensive to correct.
- Periodically perform a self-audit.
- Self-audit these procedures after significant system, vendor and/or organizational changes.
- Consider simplification of complex eligibility rules.
3. 401(k) plan loans that do not comply with IRS regulations.
IRS regulations impose numerous requirements for loans made by 401(k) plans to participants for example, limiting the amount that may be borrowed and limiting the term of the loan. Further, employers can customize loan provisions, for example, allowing multiple loans and suspending repayment during unpaid leaves of absence.
Because of these complexities, plan loans are a common source of operational failures and because a non-compliant plan loan is treated as a taxable distribution, correcting these errors can be particularly painstaking, disproportionately expensive and create employee relations issues.
- Periodically perform a self-audit.
- Consider simplifying complex plan loan provisions.
Self-Audit of 401(k) Plans
Even diligent employers can experience operational failures in their 401(k) plans. The best prevention is to self-audit on regular intervals and whenever significant changes are made that impact the plan. Curcio Webb offers benefit administration compliance reviews to help you ensure you get what you pay for and avoid unexpected costs.
Curcio Webb would welcome the opportunity to provide a one-hour call to discuss the issues described above, or any other issues you might have regarding governance and risk related to the administration of your employee benefits plans.