These 10 Critical Mistakes Could Cost Your 401K Plan Dearly

The unprecedented and unpredictable events, like we experienced in 2020, underscore the need for a strong process to manage your 401k. 

Why should you pay closer attention to the four main documents that embody the 401k plan? Because it is through these documents that the Department of Labor (DOL)  will look for mistakes in your 401K administrative process. 

Let’s lay a foundation for a better understanding of what constitutes a mistake in the eyes of the DOL. 

Common compliance mistakes:

1. Common compliance mistakes:«
   

   1. The required plan documents are missing. In the event of a DOL audit, they will request the following plan documents Adoption Agreement, Summary Plan Description (SPD), and Plan Document Amendments. I will go into detail on these documents in future blogs. For the purpose of assessing your audit readiness, if you are not sure of the location of  these documents and have not reviewed them in  a while that could be a potential problem.  These document provisions will be reviewed against the plan to ensure the plan rules are being followed.
      
      
   2. Internal audits are not being done. The contribution files and summary reports should be reviewed with each payroll cycle and at year end. Also, loan applications and amortization schedules for all loans must be accurate and updated with payroll, but they have not been reviewed.
      
      
   3. Compliance annual review not completed. The contribution tests Actual Deferral Percentage, Actual Contribution Percentage and Top Heavy tests all need to be reviewed.  These tests analyze the plan contributions and overall assets in the plan between owners, family members of owners, officers, key employees and the employees to meet IRS plan rules.  
      
      
   4. A formal employee education process is not in place. This training is important because the DOL uses this to deem employees “retirement ready”.
      
      
   5. Plan amendments have not been shared with employees, nor sufficiently explained to them to make adequate adjustments and remain “retirement ready”.
      
      
   6. Signatures missing for ALL of  the fiduciary parties & committees involved.
      
      
   7. Fiduciary responsibilities are not in place to protect the plan. The investment policy statement (IPS) outlining the criteria utilized to formulate the investment menu is the first step. You also need investment analysis, a review of the IPS and the meeting notes from each Fiduciary committee meeting.
      
      
   8. Tax forms past due and/or inaccurate. The annual 5500 and 5500-C will need to be accurate and filed electronically. The due dates are the last day of the seventh month after the plan year ends or July 31st for a calendar year plan.
      
      
   9. Beneficiary designations not maintained. You as the plan sponsor are required to maintain beneficiary designations indefinitely.
      
      
   10. Plan correspondence files not being archived. The annual plan notices such as Summary Plan Description, Summary Annual Report and annual fee disclosure all need to be archived in your records.  Also some plans will use additional notices safe harbor, automatic enrollment and Qualified Default Investment Alternative when applicable, these too need to be filed away. 

These are the most common mistakes that plan sponsors run into when involved in a DOL audit. The good news is that you can meet the compliance expectations of the DOL with the right preparation and documentation.  We believe in using a compliance binder, everything the DOL might need, organized in one place with a simple system for monitoring it.

If you are wondering whether these or other issues are lurking in your 401K plan, click here to download a Fiduciary Checklist. This checklist will walk you through all of the touch points and generate a score that will help you evaluate the compliance-readiness of your 401K plan.