Why your retirement plan is most likely in trouble

Over the last 10 years, it has been difficult to feel good about any 401(k) plan. The investment markets have had a volatile decade and returns have been negative, or minimal, at best.

“Market the plan every three to five years.”
-Paul Denu, USI Consulting Group

As Retirement Plan Consultants, we have seen all sorts of issues with 401(k) and 403(b) plans; ranging from poor service from the provider, investment menus with too little choice or too much choice, excessive fees, low participation, to errors in calculating eligibility, vesting and contribution amounts to outright lack of a plan document.

We call a mechanic when we notice a loud rattle or a strange smell coming from our car; these are signs of a potential problem. As a result, we gather resources to identify and fix the problem. However, what about the lingering problems we do not know about? What kind of maintenance checks can you, as a plan sponsor, perform to identify these small issues and avoid bigger problems that may result in heavy fines and legal fees to fix them?

This is written for 401(k) and 403(b) plan sponsors who believe their plans have no issues. Much like your car, it might be about to breakdown, you just have no way of telling because the signs are not obvious. In the case of your 401(k) or 403(b) plan, you may be exposed to a significant form or operational failure that could lead to losing the tax favored status of your plan. We worry more about plan sponsors who says things like:

•    “We have no issues with our plan, it runs perfectly, our service provider is great, they take care of everything”

•    “We have our plan audited every year by an independent auditor, so if we had problems, they would have found them”

•    “We have an Investment Advisor for our plan and they tell us we have solid investments ”

We believe five basic characteristics will be found in well executed 401(k) or 403(b) plans: 

1.    The plan offers every eligible employee the opportunity to save as much as they want in accordance with applicable regulations; thus, maximizing their retirement saving accumulations

2.    The plan offers enough investment options and support services to accommodate every type of investor and user of the plan

3.    The plan protects the participant’s ability to accumulate money by keeping the fees paid to run the plan at a reasonable level that is transparent

4.    The investment managers, based on their experience, process and philosophy, are expected to perform close to, or in excess of, their benchmark targets and in the top of their peer group

5.    The operation of the plan follows the written document and said document is written in compliance with all current tax and labor laws

401(k) and 403(b) plans are regulated by the IRS tax code and ERISA, whose rules are too numerous and complicated for any entity to ensure perfect compliance. So, even if you are confident that items 1 through 4 are fulfilled, how can you be sure you are compliant with IRS and ERISA requirements (#5)?
   
More than 15 years ago, the IRS was seeing so many errors while auditing retirement plans that voluntary correction programs were created to help plan sponsors avoid plan disqualification. This program was so successful that the Department of Labor began a similar program for fiduciary violations. From 2006 to 2008, the number of plans filing for voluntary correction rulings with the IRS rose “nearly 60%”.1 With so many “professionals” looking over plans, why is the number of plans that are making these mistakes and not following the rules increasing? The bottom line is that the plan document is the instruction manual for the plan and provides plan sponsors, recordkeepers, consultants and auditors with details specific to the plan in order to ensure accurate operation. How many of us have read our car’s owner manual from cover to cover? Not reading the plan document when operating or reviewing the plan can result in violations, which may incur significant fines. To that end, even the plan with the best service model, investment options and fee structure can become tainted and exposed to the potential for disqualification. Therefore, a loss of confidence to those involved with the plan can resonate. 

When operational or plan document errors are uncovered, clients are hard pressed to understand why they happen. Plan recordkeepers are very good at setting up systems to manage the many nuances of a retirement plan. However, those systems have to be programmed and monitored by people who may misinterpret a plan provision or miscode the system. As an employer, your finance, human resources and payroll departments may be making their own interpretations of how the plan should be operated. For example, when your staff members request salary feeds for the provider, what definition of salary are they using? Who decides how the match is calculated? Does the payroll vendor read the plan document or did you send them “your” version of how the match is calculated? As a human resources professional, how do you assure yourself that items 1 through 5 have been satisfied and continue to be satisfied? A simple maintenance schedule is all that is needed. We suggest the following to help confirm that you have the five basic characteristics of a well run plan:

1.    If any employee is being limited by non-discrimination testing failures, take immediate and aggressive action to get all employees to participate in the plan. Auto-enrollment for all employees, past and present, is the best answer. There has been too much talk about employee communication and too little achieved for those efforts. If this does not solve the problem, engage a professional to suggest more creative plan design ideas to allow full participation.

2.    The plan offers enough investment options and support services to accommodate every type of investor and user of the plan. Every plan should offer a solid menu of 15 – 20 single asset class choices, 4-5 target date portfolios and managed accounts for those employees who want professional help.

3.    The plan protects the participant’s ability to accumulate money by keeping the fees paid to run the plan at a reasonable level that is transparent. Market the plan every three to five years to help ensure that the value of the current fee and service arrangement is suitable for YOUR  plan and is competitive compared to industry standards. Benchmarking, using statistical data, is limited. It does not speak to the plan and its unique needs. Only a marketing effort will achieve this.

4.    The investment managers, based on their experience, process and philosophy, are expected to perform close to or in excess of their benchmark targets and in the top of their peer group. Hold a pension committee meeting with a qualified, independent investment advisor, at least twice per year, to verify whether these criteria are being met.

5.    The operation of the plan follows the written document and said document is written in compliance with all current tax and labor laws. Conduct an internal audit with the help of a competent professional who understands plan documents and operational requirements of a retirement plan. This should be done once per year.

While the provider may have competent professionals working on the plan, they may not be as focused on the details as you would be. 401(k) and 403(b) plans should be monitored by experienced, seasoned professionals using a checklist of common issues and mistakes to be avoided. Like bringing your car to the mechanic for an oil change, maintenance is required for your car to run properly and to ensure that it will continue to get you where you need to go! Before you end up paying penalty fees to the IRS or DOL, you may want to run your plan through a series of reviews to be sure it really is running smoothly.

About the Author

Paul Denu is a Senior Vice President and Practice Leader of the Retirement Consulting division of USI Consulting Group. He is an Enrolled Actuary and is responsible for providing actuarial and consulting services for USI Consulting Group’s clients. He has consulted on plan benefit issues for over 21 years, is well versed in the utilization of investment/insurance related products, and is a recognized expert in actuarial policies and health & welfare programs. In addition to speaking at meetings and seminars regarding employee benefit plans, he co-authored Defined Benefit Pension Answer Book, 1999, has contributed various articles on employee benefit cost benefit analysis and regularly speaks to industry groups on employee benefit topics.

Paul earned his B.A. degree in Mathematics at Western Connecticut State University. He is an Enrolled Actuary as well as a Qualified Pension Administrator. Paul holds a Life/Health Variable Products insurance license in over 20 states and maintains Series 63 and Series 65 registrations for investment advisory services. His community service includes five years as pack leader for the Middlebury, CT Cub Scouts, he is currently a member of the Financial Affairs Committee for MidState Medical Center located in Meriden, CT and is a mentor for children in foster care. Paul Denu is a registered representative offering securities through USI Securities, Inc. Member FINRA/SIPC.  Investment advice provided through USI Advisors, Inc. 95 Glastonbury Blvd., Glastonbury, CT 06033 (860)-652-3239. (05.2010.051)


1. Department of Treasury