Assessing your current 401(k) Service Provider Relationships and Satisfying your Fiduciary Responsibility
Reviewing your 401(k) Plan and Service Provider for a possible change? You need to know what questions to ask and what areas are important for you to examine further. We never liked articles like that speak in generalities, we aren’t like that. This article will give you the specific questions to ask and why along with the key areas of your plan that you may be susceptible to a possible DOL Audit or a participants citation (complaint).
At Atlas, it has never ceased to amaze us how many companies; small, medium and large only accept their current providers reports (analysis, review and Benchmark) as gospel. It is your Fiduciary Responsibility to get independent data to verify and support the information you are given. If you are audited, you can’t state that “I believed the information I was given even though I didn’t verify it with independent analysis”. No auditor will stand for that and you know the auditors will always try and find something, that’s their job. (take a deep breath!)
While most of you are using many relationships to satisfy your 401(k) Plan services, you are now dealing with possible finger pointing if an issue does arise. That’s ok, if you have the experience, you know who’s feet you need to hold to the fire. Our first section will be on key questions you need to ask about your services.
Section One – Assessing your Current Provider Relationships
Question 1: Are your Service Provider Relationships responsive to questions and requests? – this should be obvious, but have you taken a survey among the directors and management along with participants to properly assess the responsiveness? If you aren’t happy, it is time for a change.
Question 2: Do you Benchmark you plan every 1-2 years from an independent source? – we spoke about this in the introduction of this article, but we still need to ask the question. This service typically costs between $250 – $1,200 and some providers will do this at “no charge”. It is your Fiduciary Responsibility to make sure your fees are reasonable, your asset lineup is performing as expected and the investment fees are reasonable. Lastly, the analysis will show how your plan compares with others in your business and industry. LEARN MORE
Question 3: Education – Is your Investment and Financial Education sufficient and frequent enough? – this could be one of the most important areas to hone in on with your plan services. More than half of our conversations with prospective clients complain about lack of eduction or the availability to provide more on-site advisors for investment guidance. LEARN MORE
Question 4: Do your Service Provider relationships help with “Strategic Tax Planning”? – Do you have a problem with “Corrective Distributions” or a “History of Corrective Distributions”? Do you have a profit surplus this year and want to pay taxes on all of it? If you are performing Strategic Tax Planning you should be reviewing your Census and performing a pre-discrimination test at least twice per year (May and late October). First, it will help you with fixing the possible Corrective Distributions and second, it will help you plan on possible profit distribution (in a profit sharing) via the 401(k) plan. Proper planning and making sure you can pass the discrimination test will help you immensely to reduce costs and tax burden. LEARN MORE
Question 5: Do your Service Provider Relationships have a “Give Back” program? – if you are like most companies, you typically have associations and relationships with qualified Charities and Non-Profits, many local to your community. Do your service providers “Give Back” a percentage of their fees on an annual basis to support your charitable efforts? This is not for everyone, but many companies we speak with are very involved in their community and support it in many ways. Help from their vendors is always welcomed. If this is important to you, ask! If they don’t, assess for change. LEARN MORE
Section Two – Assessing your Plan
Area 1 – Fiduciary File – do you have all your plan documents, notices and other memo’s in a D-Ring binder? – It’s time to get into the 21st century and put them in cloud storage. First, this will help for accessibility. Second, it gets ALL the service provider relationships to have a centralized place to update documents in case of an audit or if someone is out-of-the-office or no longer with your company.
Area 2 – Participation Rate – do you have at least 80% of your eligible participants contributing to your 401(k) Plan? – This is a combination of factors why you may have less than 80% participation, but it is something you should be conscience of when assessing the success of your plan. If you are too “Top Heavy” with senior management contributing the lion share of the retirement contributions and not doing enough to encourage the lower half of your compensated employees to participate, this could be a problem. Many times it is ignorance. Meaning, many eligible participants may not know how your 401(k) plan works, benefits of the company match program, etc.
Area 3 – Declination Letters – when an eligible participant declines to participate in the retirement plan, they must sign a letter to “acknowledge” that they do not want to participate. You need it in writing and kept for your files. In some cases, it has been encouraged to have them sign annually that they do not want to participate.
Area 4 – 5500 Filing – this may seem obvious, but you need to make sure your 5500 filing is done on-time and reviewed meticulously. If you are over 100 employees and need an audit, you need to make sure of the firm you are hiring to complete the audit and filed properly.
Area 5 – Discrimination Testing – If you are a non-Safe Harbor plan, then you need to perform a ACP, ADP, Top Heavy and a Cross-Test on your plan and pass all four. As we recommended above, you should do this at least one or two times during the year to make sure you that you can pass testing and if you can’t pass, you can make adjustments “during” the year so you have plenty of time before 5500 filing and closing the accounting books for tax filing. Preventative measures is something we always encourage and worth the extra cost since it could save you serious money down the road.
This is the beginning. We wanted to give you a starting point to assess your current service provider relationships and your own plan for possible audit risks. If you feel you are at risk for an audit and you won’t get help from your provider, it is up to you to make a change. Also, why would you stay with a provider if they continuously didn’t provide consulting, guidance, strategic tax planning and on-going investment and financial education?
We like to “Inspire Action”. Meaning, you may have the best relationships in the world, but you still need to satisfy your Fiduciary Responsibility to the company, the plan, the participants and for your own position in the company. If you need help assessing, reach out to us for a “no charge” assessment and benchmarking. LEARN MORE
Ronald E. Lang, Principal
Atlas 401(k) Retirement Specialists
888.403.9400 – EMAIL RON – CLICK HERE