Advisers who don't assist with compliance are at risk of losing clients.
Retirement plans are complicated, and employers often find themselves too busy to give them appropriate attention.
Given the complexity of operating these plans, a large number of plan sponsors may inadvertently be out of compliance, and this can lead to tens of thousands of dollars in penalties and fees, without even including the cost of an ERISA attorney.
So, it seems pretty natural that over the years an investment adviser's role has evolved into one that, ideally, helps ensure compliance and minimize risk, which has become of utmost importance, especially as 401(k) litigation has increased.
If advisers aren't assisting with compliance, they may be at risk of losing clients as plan sponsors continue to view them as a key provider of best-practice solutions.
Here are a few steps advisers can follow to help plan sponsors:
Review plan provisions with clients
Understanding the plan is the first step toward compliance.
For example, do clients understand when participants are eligible to enter the retirement plan, and do employers provide them with the proper eligibility notice? If participants don't receive proper notice and do not elect to enter the plan, the plan sponsor may have to make employee and employer contributions on behalf of the participant, which can be a costly error.
Do they understand the definition of “compensation” that is included in the plan document governing the plan? The correct definition of compensation needs to be used to calculate employee deferrals and employer contributions.
Ensure your client is audit-ready
The Department of Labor is an enforcement agency that audits retirement plans, and the penalties it assesses can be costly. In addition, the DOL can publish the name of the plan that was assessed, as well as named fiduciaries and recoveries. There are potential costs and reputation at stake.
Audits have been on the rise, and one of the DOL's primary goals is to protect participants. The DOL can audit a plan sponsor any time, although the most common ERISA audit triggers are related to compliance issues and employee complaints.
Typically, plan sponsors are not provided with much time to prepare for a DOL audit, so it is best to do a self-review in advance of a potential audit. Prepare and go through a fiduciary checklist with the plan sponsor.
One component of the checklist is ensuring clients are keeping thorough notes from meetings with their providers and investment adviser. Notes should document decisions made on behalf of participants.
Make sure clients have a copy of their signed plan documents and service agreements and know the whereabouts of the 408(b)(2) disclosure, a fee-disclosure notice sponsors are supposed to receive from certain providers. Plan sponsors are required to review this notice, ensure they understand it, and use it to determine if fees are reasonable for the services provided.
Be aware of disclosures and notices
It's important plan sponsors are aware of the disclosures and notices required to be delivered to participants.
They include the annual and quarterly fee-disclosure notice (the 404(a)(5) notice), summary annual report, summary plan description, investment option change notice, safe harbor notice (if applicable), and eligibility notice, just to name a few.
Confirm they know how and by whom those disclosures are being delivered. Plan sponsors often assume the third-party administrator is delivering required disclosures when they're not — even if perhaps they should be.
Monitor plan administration
Ensure the overall administration is in check. What may seem simple, such as administration of loans and hardship withdrawals, can be tricky.
Make sure the following questions can be answered easily: Who's tracking the six-month suspension for hardship withdrawal? Will participants be automatically enrolled after that suspension? Who's tracking defaulted loans?
Even if the third-party administrator is handling these items, the plan sponsor should understand and approve decisions because, ultimately, they're responsible for the operation of the plan.
Investment advisers, along with third-party administrators, are on the front lines in helping clients navigate through complex environments. The best feel duty-bound to help plan sponsors identify compliance issues and involve the right experts.
Susan Shoemaker is a partner and head of the retirement investment consulting practice at Plante Moran Financial Advisors.
