Retirement Plans can be a spooky subject to discuss, whether you’re an employer, participant or an advisor.
As compliance consultants/TPAs, we correct retirement plan related mishaps almost daily. From missed deadlines to failed tests and lost earnings, we do our best to keep our clients out of harm’s way when it comes to mismanaging their 401(k)s.
However, sometimes mistakes are made that are out of our control or caused by previous providers. We’re going to share two stories to help illustrate the importance of education and oversight on retirement plans, and your role in properly managing them as both a Plan Sponsor and a participant.
A small business had an established 401(k) plan. They moved to a new TPA and after reviewing the plan and scrubbing the census data, the TPA noticed something odd about the participants’ accounts. While deferrals were taken out of the participant’s checks, very few deposits were made into the plan. As a plan sponsor, it is your responsibility to ensure all participant contributions to the plan are deposited into the plan in a timely manner.
After some digging, the TPA realized the deposits had been missed for several years. Although the client was a small business with only a handful of participants, once all the missing deposits were added up, over $300,000 was missing from the plan. In addition, the average Lost Earnings, or the additional money they would have been accumulating if the money had been timely deposited into the plan, exceeded $1,500 per participant. The plan sponsor had to pay excise taxes on the lost earnings, and had to cover the cost of the review and corrections for each year the deposits were late or missing.
In total, it cost the Plan Sponsor almost $400,000 to correct the plan.
This all could have been avoided if the plan sponsor had properly overseen the person within their company that was charged with the duty of depositing the funds into the plan.
As a participant, you should receive an annual summary of your account, and you can also check your account balance with the plan’s record keeper. This information should be provided to you when you sign up for the 401(k) plan. At least annually, but preferably more often, you should review your account.
401(k) distributions represent a portion of our services for the participants of the plans we service. The reasons for a distribution can range from a participant terminating their employment, to simply reaching age 70 ½ (the age that Required Minimum Distributions typically begin.) Occasionally, we also have to process a death distribution.
The situations around death distributions are unpleasant enough, but when you add in a divorce and stale beneficiary designations, the process gets even messier. In a 401(k) plan, the spouse is automatically named the beneficiary of the participant’s account unless the spouse formally signs a consent form waiving their rights to the benefit. Participants should always complete a beneficiary designation form and review their beneficiary designation from time to time.
In this story, the participant divorced her spouse 10 years prior to her death. The spouse was the second spouse of the participant and the stepparent to the participant’s children. The spouse had been named on the beneficiary designation when the participant enrolled in the plan. The plan did not automatically remove the spouse as the named beneficiary when they divorced, and the participant did not update her beneficiary designation form. The participant did not remarry. When the participant passed away, the ex-spouse, as the named beneficiary, received the benefits from the deceased participant’s retirement account.
Both of these situations are easy to avoid. As a plan sponsor, you should seek proper education about your duties as the sponsor. You should ensure that you engage qualified service providers to assist you in your duties. The more duties you wish to delegate, the more involved and qualified your service providers should be. You should oversee those service providers you hire to service your 401(k) plan and meet at least annually with your investment advisor and compliance consultant/TPA. This can help prevent your plan from becoming the main character in a SPOOKY 401(k) tale.
Questions on how to avoid mishaps like these? Call your advisor, or email us.