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Would the Department of Labor or Internal Revenue Service say your defined contribution plan needs help from a CPA or ERISA lawyer for a 401K audit?

How Healthy is Your Defined Contribution Plan?

Is your defined contribution plan running a fever or would the Department of Labor and/or the Internal Revenue Service give it a clean bill of health?

This year more than ever, particularly with all of the health care changes, there has been a lot of buzz about personal health care.  Instead, let’s focus on the health of your defined contribution plan. Similarly, like the human body, your plan consists of many parts, all designed for exact and demanding tasks.  They all work together and when they are given the proper care and supervision, it leads to good health and well-being.

Let’s start with a typical exam from the top down:

  1. Eye Exam – Who is overseeing the performance of your defined contribution plan’s investments?  Are the investments being reviewed on a regular basis and compared to similar funds to develop benchmarks?  How about the fees associated with those funds?  Are the fees reviewed for reasonableness?   Are you documenting the review of such? Have the participants in the plan received the proper notification as required by ERISA?? If you are not doing this, you may need a prescription for a specialist that can assist you with these duties.  
  2. Heart and Blood Pressure – Who is checking the Plan Document to ensure that the defined contribution plan is operating in accordance with the plan provisions? How many employees are participating in your plan?  Are the eligibility requirements along with other requirements in your plan document being followed?  Are you using the right definition of compensation for employee deferrals or a company match?   Take a look at your plan document from time to time to keep yourself familiar with those requirements.  When in doubt, look it up. 
  3. Weight Gain – How often are you feeding your defined contribution plan (meaning, how quickly after the employee’s receive their paycheck are their 401(k) deferrals and loan repayments being deposited into the plan)?  The general rule is that participant deferrals should be deposited as soon as it is administratively possible if you have a large plan (greater than 100 eligible participants). If you have a small defined contribution plan, then the deferrals should be deposited no later than the 7th business day following the date payroll is paid to the employees.  Participants want their account balance as “heavy” as possible so care should be taken to fatten up their accounts as soon as you can.
  4. Weight Loss – Distributions from the plan should be made timely and in accordance with the defined contribution plan’s provisions.  Were the participant’s instructions followed on the distribution form?  If a full distribution was requested, did the participant’s balance go to zero?  Was the distribution paid timely?  Was the correct vesting schedule utilized to pay the correct amount?  These are all items that need to be monitored even if the distribution process is done online and outsourced to a third party.  Remember, a plan fiduciary can outsource various tasks of the plan but the responsibility remains with the plan sponsor. 
  5. Need a Referral –  Does your defined contribution plan require an audit (annual check-up)?  The number of  “eligible” participants at the beginning of the plan year determines if an audit is required.  Generally, if there are more than 100 “eligible” participants (a large plan), an audit is needed.  Consider completing your own annual check-up by performing a self-audit to test the various provisions of the plan for compliance.
  6. Specialists – Often times a general practitioner is not sufficient and you need to seek out a specialist.  You should surround yourself with qualified CPAs, ERISA attorneys, investment advisors and third-party providers that have the expertise in this area to assist you in keeping your plan healthy.   Remember: You can outsource certain things in your defined contribution plan, but you can never outsource the ultimate responsibility.  The buck (co-pay) stops with the plan sponsor!

The ongoing prescription is to be proactive rather than reactive.

After reviewing the steps to a check-up, we hope your defined contribution plan is healthy and well.  However, if not, do not get discouraged; even the best designed plans sometimes get the sniffles.

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