If you own a vehicle, you know that regular tune-ups and oil changes keep your car from breaking down when you need it and save you time and money in the long run. It’s no different if you manage a 401(k) for your employees. Proactive 401(k) maintenance is essential for avoiding big problems and financial liability.
Here are a few of the things you or your co-fiduciary needs to do regularly to stay within the law and be a good manager of your employees’ retirement accounts.
Form 5500
Every year, you have to submit form 5500 to the IRS. It’s due 7 months into the plan year—July 31st if your plan year begins January 1st. If you file it late, incorrectly, or not at all, you can be liable for an expensive third-party audit, large penalties, or damages.
If your plan has fewer than 100 participants, you will be filling out the slightly simpler form 5500-SF. Either way, these forms must be submitted electronically. If you’re the sole fiduciary, the forms are your responsibility, but some co-fiduciaries are legally allowed to do it for you.
Benchmarking
Benchmarking is the name for the process of assessing your plan and comparing it with others. You should benchmark your plan against comparable plans at least every few years, because prices, available plans, and your situation all change over time.
First, consider if the plan design is working for you and your employees. Is everyone eligible that you want to cover? What kind of accounts are available? How much is the company contributing? These are options you may want to change from time to time.
Another important factor is the selection of funds where the money is invested. Are they competing well in the market? Are they properly diversified? Does the risk match the risk you and the plan participants want?
You’ll want to consider the fees you or your plan participants are paying and whether they are comparable with what competing plans charge. That should include the cost of hiring an advisor to manage the plan, if you do. Are you getting your (and your employees’) money’s worth for those fees? Conversely, could paying a little more for an advisor that takes on more of the administrative burden save you money in the long run?
If all this seems complicated, don’t worry: you can hire a professional to benchmark your 401(k) plan for you.
Checking and Updating Plan Documents
At least every few years, you should check through your plan to make sure it still abides by current laws. The IRS periodically updates laws, which means your plan will need to be updated to match. Amendments to your plan documents will need to be made by the appropriate deadline.
While you’re doing that, it’s a good time to check for errors. Errors that could endanger your plan’s tax-advantaged status include:
- Not covering all eligible employees
- Not giving employees the required disclosures
- Not depositing employee deferrals promptly
- Not depositing employer contributions promptly
- Not following the terms of the plan document
- Not limiting employee deferrals and employer contributions to the legal maximums
- Not filing form 1099-R when an employee takes a distribution from the plan
The IRS encourages fiduciaries to correct these problems as soon as possible.
Disclosures
The Department of Labor requires a number of disclosures to plan participants regularly. This will include:
- Annually, a Summary Annual Report, which summarizes information that was on your Form 5500
- Annually, a report of the fees that may be deducted from their accounts
- Quarterly, a statement of the value of their accounts, including total and vested account balance, the value of each investment, and limitations on their direction of those investments
- Quarterly, a statement of the fees that have been deducted from their accounts so far
Nondiscrimination testing
Every year, you should perform nondiscrimination testing. This ensures your plan benefits all employees equally, not just the highest-paid or most essential employees. This is an especially difficult goal to meet for small businesses, which may have many highly-paid employees or employees who are family members. This can result in the plan being top-heavy—weighted toward highly-paid or key employees.
Passing your nondiscrimination test is essential to adhering to ERISA and staying out of the way of the IRS. Test your plan early enough to take remedial action if you don’t pass. Traditionally, a test is done on the last day of the plan year or the first of the next year, but a mid-year test can be useful too.
Getting Help With 401(k) Maintenance
All of this necessary maintenance takes time and know-how. That’s why it often makes sense to hire outside help to get it done. With a knowledgeable financial advisor, you can put some of these burdens on another pair of shoulders. Having someone who knows the legal requirements handle Form 5500, regular benchmarking, updating and checking the plan for errors, necessary disclosures, and nondiscrimination testing will keep your plan up to date and working smoothly.
Are you looking for an advisor to assess your plan now and make sure it’s competitive? Or do you want someone to manage your plan in the long-term? Advice Chaser can set you up with whatever services you need to manage your 401(k) and keep it working smoothly—and legally. Schedule a call with us today!
