An ounce of prevention is worth a pound of cure. This saying is universal, and certainly applies to fiduciary responsibility. Beginning the year with an eye towards avoiding some of the most common errors makes sense. Most fiduciary errors are unintentional or even well meaning. Here are some common fiduciary breaches:
Not Following Plan Documents
Interpretation of plan provisions is not always intuitive and often plan operations do not match up with the plan terms. For example, the definition of compensation in the plan document may not be the same definition used by your payroll department/service. The manner in which hours are calculated or hire dates are determined must match up with plan document provisions. Administration of participant loans is another area that can cause issues, especially if more than one loan is allowed at a time or loan payback is allowed to continue post termination of service.
Not Allocating Plan Forfeitures Timely
Plan forfeitures (non-vested assets left in plan by a terminated participant) should be allocated annually at years end. All too often it is not accomplished annually which violates the rule forbidding plan unallocated assets and can require a costly and administratively cumbersome correction.
The remittance of participant deferrals to the plan is required “as soon as administratively possible”. This means as soon as possible, not as soon as convenient.
Not Communicating Plan Changes
Changes in the plan should be communicated to plan participants. A summary of material modifications should be given to plan participants within 210 days after the end of the plan year in which the modifications were adopted.
ERISA Reporting and Recordkeeping
Employers are required to maintain records relating to employee benefit plans per ERISA. Record maintenance varies by type of document for both plan level and participant level records. Plans with 100 participants or more must file Form 5500 Annual Returns/Reports of Employee Benefit Plan and conduct an annual audit. Smaller plans must also file annual reports, with plans with less than 100 participants filing Form 5500-SF.
Many administrative errors go on for years, and every year not corrected is another fiduciary breach. The best answer to these concerns is to avoid fiduciary breaches in the first place. Financial professionals can often detect the possible emergence of potential fiduciary breaches before they manifest and consult on ways to avoid these breaches.