In the context of American retirement policy, the 401(k) plan has rather evolved, for better or for worse, to become a centrepiece. With these changing pressures, it is crucial to examine some of the common pitfalls that occur with 401(k) plans, which can often be overlooked in the fast-paced corporate world.
As Part Two of this series driven by the Employee Retirement Income Securities Act of 1974 (“ERISA”) suggests, these ‘misses’ can range from simple administrative errors to more complex issues relating to compliance and fiduciary responsibilities. This includes a careful understanding of changes in law and regulation, interpretation of legislative provisions, and consideration of the evolving market trends and financial products suitable for investment.
- The first common oversight pertains to nondiscrimination testing. These tests occur annually to prevent discrimination in favor of highly compensated employees in elective deferrals and/or employer contributions, as required by ERISA. A miss in this area could potentially risk the plan’s tax-qualified status and necessitate correction via an IRS-sanctioned program.
- Second is the underutilized tool of a 401(k) plan audit. Often overlooked due to perceived complexities and potential costs, there are cases where an audit is mandated by law based on plan size. For large plans, this could serve as an excellent risk management tool, mitigating future obligations and liabilities.
- Third, there is often a lack of understanding of fiduciary duties and liabilities relating to 401(k) plan administration. It is crucial for plan sponsors to avoid potential ERISA violations by providing comprehensive and ongoing training to their fiduciaries.
The 401(k) plan has undergone considerable shifts in its role and stature within retirement policy. The issues highlighted above continue to be important for employers and plan sponsors to grasp to ensure they are compliant while serving the retirement needs of their workforce effectively.