Administrative 401(k) mistakes now cost more

The Labor Department is increasing payouts for civil penalties related to retirement plans

Jul 6, 2016 @ 1:37 pm

By Greg Iacurci

The Labor Department has increased the civil monetary penalties assessed to retirement plans, due to an inflation adjustment the government is mandating for federal agencies.

These monetary penalties, enforced by the DOL's Employee Benefits Security Administration, are assessed for noncompliance with certain administrative rules under the Employee Retirement Income Security Act of 1974.

The last time these sorts of civil penalties were adjusted for inflation was in 2003, according to the DOL. The 2015 Inflation Adjustment Act requires agencies to adjust the levels of monetary penalties with an initial “catch-up” adjustment, factoring in inflation through October 2015. Following this initial adjustment, agencies such as the DOL will have to adjust for inflation on an annual basis.

Inflation adjustments are based on a formula taking into account information such as the current civil penalty, the year the penalty was last set by law and an inflation factor determined by the Office of Management and Budget.

The Labor Department published its catch-up adjustments in the Federal Register July 1. The catch-up adjustments will apply to penalties assessed after Aug. 1 this year, whose associated violations occurred after Nov. 2, 2015.

Starting in 2017, the DOL will adjust penalty amounts for inflation annually by Jan. 15.

Some of the penalties are being substantially increased, in relative terms. For example, failure or refusal by employers to file an annual Form 5500 — an annual report required for 401(k) and other retirement plans — will carry a maximum civil penalty of up to $2,063 per day, almost double the current penalty of up to $1,100 per day.

“The biggest penalty we see is the failure to file the 5500, where someone just forgets it, messes up or doesn't do it,” said Anthony Domino, Jr., managing principal at Associated Benefit Consultants.

As another example, the penalty for failure to furnish certain reports, such as pension benefit statements to former participants and beneficiaries, has increased up to $28 per employee, compared to $11 previously.

“Net, I think it's a positive,” said Aaron Pottichen, principal and retirement services practice leader at CLS Partners. “I don't like it when clients have to pay a fee, but 401(k) is so low on companies' totem poles. The only time it's actually relevant [to them] is when their highly compensated employees are mad, when the 401(k) is not helping retain employees and when there are penalties.”

Most noncompliance issues are “sins of omission” or an accidental goof, as opposed to an action taken purposefully, Mr. Domino said. And penalties are rare, he said, because intermediaries such as third-party administrators, record keepers and advisers generally help employers follow the compliance rules.

Even if advisers push clients, though, it's not always a given they'll fall in line. A client of Mr. Pottichen's was fined $10,000 this year for failing to complete a nondiscrimination test on time, despite repeated calls for the employer to take action.

When a mistake is noticed after the fact, Mr. Domino often recommends employers take advantage of the DOL's Voluntary Fiduciary Correction Program, which allows employers to voluntarily report and correct fiduciary violations to avoid civil and criminal penalties.

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