The Department of Labor has concerns about compliance with the Employee Retirement Income Security Act regulations as well as proper administration of employee benefit plans. Plan sponsors have a fiduciary responsibility to maintain effective policies and procedures to meet regulatory requirements.

Here are four common issues that plan sponsors face and ways to successfully navigate them:

Plan investment options

One of the key components to making sure a company’s employee benefit plans are being administered properly, is to ensure that the plan options are appropriate and in accordance with the plan’s investment policy statement. An oversight committee should be designated to regularly review investment options offered to plan participants. This includes a regular screening of the options available to determine that investment earnings, as well as administrative and investment fees, are reasonable and in accordance with expectations. Even commonly used target retirement date funds can be considered inappropriate for participants if their fee structure is considered excessive. A plan sponsor can rely upon the service provider to provide advice in selecting a diverse group of investment options; however, the plan sponsor is ultimately responsible for selecting appropriate investments and monitoring the plan’s investment performance. 

To meet fiduciary responsibilities, first develop a clear investment policy statement for the plan, which outlines the criteria used to select the investment options. Then perform a benchmark study to determine if the plan’s fee structure is reasonable compared to other comparably sized plans and investments.

Also see: Which type of fiduciary should plan sponsors hire?

Remittance of participant contributions

Timely reconciliation is a common issue. Participant contributions and loan repayments should be remitted on the earliest date on which they can be segregated from the plan sponsor’s general assets. Establish policies and procedures to ensure the timely reconciliation of contributions and loan repayment remittances and to ensure agreement to the amounts withheld from payroll and remittance to the plan on a timely basis.

Some third-party administrators offer participants the ability to enroll in the plan as well as change their deferral elections online. In a paperless environment, plan sponsors should establish policies and procedures to ensure that communications received from the TPA are timely processed and that the correct participant elected deferrals and loan repayment amounts are remitted to the plan. 

Plan definition of compensation

Companies continue to face the challenge of ensuring all deferrals and allocations are based upon the correct plan definition of compensation. The plan must define the inclusion or exclusion of payments in compensation, such as bonuses, vacation, overtime, fringe benefits and commissions. Any changes to the payroll system or nonroutine transactions, such as manual payroll checks without proper consideration of the plan’s definition of compensation, can quickly result in costly compensation errors.

To avoid these errors, plan sponsors should implement procedures to require a timely review of the plan’s definition of compensation with any new human resources and payroll personnel, as well as when changes to the payroll system are made. Amendments to the plan should be reviewed with both the TPA and payroll processor to ensure any impacts on plan compensation are properly addressed. Plan sponsors should also consider using one definition of compensation for all plan purposes in order to simplify the process. 

When errors occur that result in too much compensation being included in eligible wages, excess elective deferrals are generally required to be distributed to the affected participants. Excess employer contributions may be allocated to the plan forfeiture account to be reallocated based upon the terms of the plan document. On the other hand, when a plan erroneously omits compensation from eligible wages, the employer is generally responsible for remitting 50% of the missed deferrals as well as lost earnings on behalf of the participant. These errors may be both costly and time consuming for the plan sponsor to recalculate the impact on all plan participants during the correction period. Each plan definition of ‘compensation error’ should be evaluated based upon the individual circumstances to ensure proper correction.

Also see: Fiduciary concerns challenge plan sponsors, despite 401(k) savings improvements

Hardship distributions

There are a number of regulations in place that guide hardship distributions. For example, prior to the plan sponsor authorizing a hardship distribution, participants must meet certain requirements to demonstrate financial the need (i.e., paying medical expenses, costs related to the purchase of a principal residence, prevent foreclosure from a principal residence.) Additionally, it is generally required that deferral contributions be suspended for a period of six months following a hardship distribution. That said, it is important that companies do not rely too excessively on their TPA to approve distributions, without requiring the participant to provide supporting documentation that demonstrates immediate and significant financial need prior to the plan sponsor’s approval for a hardship distribution.

For any plan that allows hardship distributions, the amount should not exceed the financial need of the employee and may include amounts such as taxes or penalties that result from the distribution. The financial need may also include that of an employee’s spouse or beneficiary. The plan document often will specify what information must be provided to the employer to demonstrate hardship. Plan sponsors should review the hardship procedures with their TPA thoroughly, in order to establish additional review procedures as necessary to meet IRS hardship distribution regulations as well as to maintain support that proper approval procedures exist.

Plan documents should be reviewed regularly with the TPA for opportunities to clarify fiduciary responsibilities. The plan’s TPA can assist the plan sponsor in meeting regulatory requirements; however, in a paperless plan environment, it is important to define roles and responsibilities of the plan sponsor, who is ultimately responsible for implementing plan policies and procedures.

Stephanie A. McGuire ( is a manager in the audit, accounting and consulting department of Ellin & Tucker. She provides audit, accounting and consulting services for numerous defined contribution and defined benefit plans, as well as health and welfare plans, for clients in the manufacturing, wholesale distribution, and not-for-profit industries, both nationally and internationally.

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