Responsibilities of 401(k) Sponsors

Sponsoring a 401(k) plan can bring tremendous value to your organization. Having a great benefits plan can boost the morale of your team members and improve your ability to attract and retain top talent. Managing your 401(k) plan, however, can get more complicated. Many companies are failing to meet their basic responsibilities as plan sponsors. Whether you sponsor a large or small plan, your fiduciary responsibilities are the same. Both the Department of Labor (DOL) and Internal Revenue Service (IRS) conduct examinations of 401(k) plan sponsors, so it’s critical to understand and meet your responsibilities.

The Biggest Misconception of 401(K) Plan Sponsors

Many plan sponsors are overly reliant on third-party service providers, assuming that because they are paying someone else to manage their plan all of their responsibilities have been met. In reality, 401(k) sponsors frequently fail to meet their basic fiduciary responsibilities and, in doing so, fail to look out for the best interests of their employees and their organization. Failing to meet requirements can lead to larger investigations from the IRS and the DOL and more money from your pocketbook.

Fiduciary Responsibilities of Plan Sponsors

As a plan sponsor, you are responsible for managing the assets of your employees. The IRS and the DOL have published requirements on the fiduciary responsibilities of plan sponsors.

Commonly Overlooked Requirements

  • Holding plan management meetings at least once per year to review the plan’s performance.
  • Quarterly statement reviews to look for any inconsistencies that could indicate fraud.
  • Reviewing fees charged to both the plan and plan participants to ensure that they are reasonable.

Your third-party provider can also help you understand your responsibilities. Just remember that hiring a third-party plan provider alone doesn’t ensure that you are meeting your responsibilities; in fact, reviewing their work is part of your fiduciary responsibility.

Pitfalls Found During Dol and IRS Examinations

Government examinations are not the best time to discover problems with your plan. Understanding what problems are typically found during examination can help plan sponsors find and correct problems before they are revealed under examination. Many sponsors fail to meet document retention requirements, mistakenly assuming that their third-party plan provider keeps all documents. When participants take a hardship distribution or borrow money from the plan, these activities must be documented, and records should be retained.

It is common for plans to fail to adequately define ‘salaries’ and ‘contributions,’ which leads to incorrect matching contributions that can create liability and interest for the plan sponsor. Many smaller plans have nondiscrimination issues, where plan contributions are unfairly top heavy. Other plans have problems omitting eligible employees. Management must notify employees when they become eligible and follow up on participation.

How Can Sponsors Correct Previous Mistakes and Become Compliant?

The DOL voluntary fiduciary correction program generally provides plan sponsors with the opportunity to self-report and correct problems before fines are assessed. Both the IRS and DOL are generally much more lenient regarding self-reported corrections than problems found under examination.

Regardless of the size of your plan, you have a fiduciary duty as the plan sponsor. While larger plans require audits that often identify problems during the audit process, smaller plans must also ensure that their fiduciary responsibilities have been met.

For more information regarding the responsibilities of 401k sponsors, get in touch with one of our 401k plan auditors.