Pensions, 401(k)s and other retirement plans must conform to a multitude of strict requirements designed to protect participants and ensure rigid compliance with tax law. Plan sponsors are responsible for knowing and following rules spanning accurate recordkeeping, timely reporting, faithful fund transfers and conformance with rules on loans, withdrawals, distributions and equitable treatment of all participants.
Make a mistake or overlook a rule in setting up or administering a plan, and a sponsor can find themselves technically out of compliance. If violations surface, the stage is set for the U.S. Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation to swoop in to demand costly corrective actions and levy substantial fines and penalties.
Managing and overseeing a retirement plan for hundreds or thousands of employees is a big job that carries a lot of responsibility. Unfortunately, many plans are being run without an overseer who knows the big picture. CPAs, mutual fund companies and lawyers can provide some of the supplementary knowledge and advice, but it’s the rare company that has truly competent central administration in place. As plans grow in complexity, a good pension administrator is equal parts labor lawyer, investment advisor, payroll expert, computer expert, administrator and communicator.
A problem with many plans is that they’re not converting the right amount of tax dollars into retirement savings for the right people. And that’s primarily because the company didn’t do a good job of selecting the right plan out of the gate. For example, a typical 401(k) plan, the most popular default plan partly because it can bring everybody in, is a terrible vehicle for building a solid retirement base for high earners. Plan participants are limited to $17,500 annually. That doesn’t shelter near enough money for a top manager or owner who might need to build a $3 million nest egg.
In setting up retirement plans, employers take on a big set of responsibilities to act faithfully on behalf of participants. But the fact is, many don’t understand or appreciate the wide range of fiduciary issues that they have when running any kind of employee benefit plan. If they’re too busy managing their businesses, it’s not uncommon for many to ultimately fail in carrying out those responsibilities. As laid out in the Employee Retirement Income Security Act (ERISA), those responsibilities include:
Loans and withdrawals for hardship and upon leaving an employer are typically permitted in many plans. But there are usually strict rules governing how and when participants can tap their money. Such plan “leakage” has been on the upswing in recent years as financially squeezed workers look for relief. That has tested the quality of employers’ understanding of withdrawal rules, often resulting in clear violations that can lead to enforcement actions. Too few employers are assuming the responsibility of both fully understanding the rules and clearly communicating them to participants.