Plan provisions that every 401(k) plan should have

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Not all 401(k) plan service providers are created equal. Your employees and you deserve a prudent and effective plan to secure a successful retirement.

I probably have drafted and amended thousand of plan over the years and every plan has its own little quirks. When it comes to plan design, I have always believed that some of the bundled providers have it wrong. There is no cookie cutter approach to retirement plan design; so many plans being handled by bundled providers are underserved because the plan document doesn’t fit what the plan sponsors needs or wants to do. You’ll have prototype, fill-in the blank documents that doesn’t have all the choices that a plan sponsor may want or need. For years, I actually was recommended by one of the largest providers to draft amendments to their prototype documents because up until the EGTRRA restatement documents, they had no provisions for new comparability profit sharingallocation.That being said, even with prototype and non-prototype, I am often amazed on what provisions that plan sponsors don’t have. I am not talking about required contributions like safe harbor, I’m talking about provisions that are common sense and help facilitate administration. I’m talking about 401(k) plan provisions that plan sponsors eventually end up needing one day that they end up spending money to amend the plan to add these provisions. Here are some plan provisions; I like to see in every plan document:

  1. Allowing plan participants to rollover money into the plan and allow them to withdraw it at any time.
  2. In-service distribution, allowing plan participants to access their money at age 59 1/2 , even if they are still working.
  3. Loans, not a big fan of them, but participants may need it for one reason or another.
  4. Hardship provision, same view as #3.
  5. Discretionary profit sharing and matching contribution provisions. Even if a plan sponsor never wants to make one, I feel having those provisions in there are better than not and having a plan sponsor wanting to add them because with the language needed for an amendment, you’ll actually need a new document.
  6. Roth 40(k) provision. I see no reason in not offering it.

Plan sponsors need to understand that all 401(k) service providers are not all alike. Your company sponsored retirement plan is a benefit to your employees that is essential to their financial future.

Please comment or call rto discuss how this affects you and your company plan.

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Service Provider Fee Disclosures Under ERISA

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Many plan sponsors are unaware of their fiduciary duty to understand all the fees paid in their company sponsored retirement plan. The awakening is coming, be prepared.

Employers that sponsor qualified retirement plans should be aware of the new fee disclosure requirements that will apply to record keepers, trustees, brokers, and other advisors to qualified retirement plans beginning April 1, 2012. Although these fee disclosure requirements apply to the service providers, employer sponsors of retirement plans will be obligated to determine whether or not the service providers to their retirement plan have complied with the fee disclosure requirement. In addition, employers must be prepared to evaluate the information they receive to more closely scrutinize the fees being paid to service providers.Failure to comply with the disclosure requirements may cause the employer and the sponsor to violate the prohibited transaction rules under ERISA, which may result in penalties imposed on service providers and plan sponsors. Set forth below is a summary of the action steps all employer sponsors of qualified retirement plans should be taking to comply with the April 1, 2012 deadline.

Adopting Employers in a multiple employer plan do not contract with service providers. This is a great opportunity for the employer to concentrate on running their businesses instead of worrying about yet another regulation to follow. A multiple employer plan allows the employer to handle their 401k just like they do all of their other employee benefit programs….they outsource virtually all of the compliance details to professionals who have ‘skin in the game’.

Please comment or call to discuss how this would affect your organization.

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Retirement Plan RFPs Every 3 Years – The New Normal?

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When you consider all the changes taking place this is a excellent solution to verify the quality of your retirement plan. Your employees and yourself require the best possible plan in order to successfully retire. A well managed retirement plan has the ability to attract and retain top talent.

In the preamble to its 2010 service provider fee disclosure rules, the Department of Labor (DOL) assumes (or one might say suggests) plan sponsors conduct an RFP about every three years. While this is contrary to industry studies concluding a majority rely on outside consultants or studies instead of RFPs, the 2011 Seventh Circuit Court of Appeals decision in George v. Kraft Foods is reinforcing concerns this is the new normal for a prudent plan fiduciary.Kraft’s 401(k) plan participants sued for breach of fiduciary duty alleging Kraft should have done an RFP every three years and this failure resulted in payment of excessive investment fees to the plan’s service provider. A lower court accepted Kraft’s defense that it relied on expert outside consultants to ensure fees were competitive when extending that service provider’s contract multiple times and granted summary judgment in Kraft’s favor. On appeal, the Seventh Circuit rejected that as an absolute defense and sent the case back for a trial, which could end up costing more than settling.

The retirement crisis will result in additional regulations. Plan sponsors must take their company sponsored retirement plan more seriously or risk employee and regulatory backlash.

Please comment or call to discuss how this affects you and your company.

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Online Participant Advice & Financial Planning

Not only is there potential fiduciary liability for failure to examine this issue, but also the ERISA Section 404(c) safe harbor (which insulates a plan sponsor from ERISA fiduciary liability) may be negated by a failure to identify and disclose all plan fees and expenses to participants.  (Are you at risk of negating your safe harbor status?)

In addition, arrangements with service providers may be considered prohibited transactions under Section 406 if the exemption provided in Section 408(b)(2) is not satisfied, subjecting the plan fiduciaries and the service providers to tax penalties. To satisfy the requirements of this exemption, an arrangement between a plan and a service provider will not be a prohibited transaction if: 1) the contract or arrangement is “reasonable,” 2) the services provided are necessary for operating the plan, and 3) the service provider’s compensation is “reasonable” for such services. Currently, the standard for evaluating what fees are reasonable is unclear, making it difficult for plan sponsors to determine whether a service provider arrangement will constitute a prohibited transaction.

A Ploy Named Sue
This has led to a flurry of ”hidden fee” litigation, reflecting plan participants’ dissatisfaction with inadequate fee-disclosure requirements and the need for protection from excessive fees. Plan participants have filed multiple lawsuits against plan sponsors, claiming that the decision to pay excessive investment and administrative fees was imprudent and a breach of the fiduciary duty of care.  (Why not move away from “hidden fee” arrangements and enlist flat fee providers who fully disclose their services to not only protect you, but do the right thing for your employee participants.  By using the right provider you may be able to document a higher value service for a lower flat fee…thus removing the “wind in the sails” of participants claiming excessive and imprudent fees etc.  If your vendors won’t do this, shouldn’t you find one that models their practice around how you choose to do business rather than requiring you to conform to them, the vendor?)

As a result, employer plan sponsors have hired investment consultants to advise them on the reasonableness and identification of plan investment and administrative fees and expenses. In fact, there is a tendency to rely on such independent advice from outside experts.

Most plan sponsors are unaware of the fiduciary risks they assume. The new fee disclosure regulations, effective January 1, 2012, will increase the clarity of fees as well as increase the lawsuits by employees. Remember, an employee only needs to file a complaint with the Department of Labor. If the DOL finds merit they will file suit on behalf of the employees.

Please comment or call to discuss how this affects your organization.

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