High Impact Tips for 401(k) Plan Sponsors – Be Prepared!


Several weeks ago, central Pennsylvania plunged into a deep freeze as a so-called “bomb cyclone” ravaged the East Coast.  In the first week of January, I was staring out of my office window at single-digit temperatures, contemplating the fact that I was headed off to go winter tent camping with my son’s Scout troop mid-January. Never has the whole “be prepared” motto seemed more tangible to me.  Fortunately, we geared up properly, somewhat milder temperatures prevailed, and we all had fun!

Thankfully, nobody is going to get hypothermia from a retirement plan, at least directly.  But there are certainly some things that a fiduciary can do to be prepared.  Or at least to be better prepared.

Devise reasonable internal procedures with checks and balances. For those of us who work with 401(k) plans and similar retirement vehicles, one thing that seems very unfair is that some outsiders assume they are simple.  Nobody assumes that rebuilding a car engine or filing your taxes or figuring out how to get your kids to clean their rooms is simple.  But for some reason, there’s this impression in some circles that running a retirement plan is cakewalk just because we’re not, say, building the space shuttle.

On the other hand, those of us who are in the know such as TPAs, HR staff, and accountant/CFO types understand that running a 401(k)-type plan can be very complicated and requires a lot of procedures.  Your TPA has well-documented procedures to do so (or they should!).  But your TPA doesn’t make sure that benefit forms on someone’s desk in your organization get approved in a timely manner, or that payrolls get deposited on time, or that fraud doesn’t occur under your roof.

I could go on and on about why you must have well-documented procedures, but that would take several pages.  Suffice it to say that they are of prime importance from an administrative, risk management, and fiduciary standpoint.  The DOL has even said that the presence of written policies and procedures and evidence they are followed may limit the scope of an audit.

The good news is that the IRS and DOL do not have requirements for procedures.  They just need to be reasonable, taking into account the characteristics of the plan and the organization.  A Fortune 500 multinational with many locations will have different procedures than a 20-employee welding contractor.  The bad news, if you could call it that, is that this means there is no prescribed way to do this – you need to figure out what makes sense for your organization.

So take some time and document your procedures.  Make sure they are followed, and that the following of them is also documented, such as with checklists.  Ensure there are some built-in checks and balances.  Someday you could be very glad you did.

Insure or self-fund your fiduciaries’ liability. There are a lot of things you probably shouldn’t do without insurance.  Among them would be driving a car, owning real estate, skateboarding, and eating at that sketchy restaurant across town that never seems to have enough cars in the parking lot.

Becoming a fiduciary exposes you to personal liability risk.  And while that risk may be minimized through prudent process design and documentation, it is still there.  Before accepting a plan fiduciary position, internal fiduciaries should know how their liability will be insured, or otherwise covered.

Self-insurance or reserve funding may be the appropriate approach in some cases, but many sponsors purchase fiduciary liability insurance instead.  This is not the same as the plan’s fidelity bond that protects the plan itself from fraud.  Nor is Directors & Officers (“D&O”) insurance adequate for this purpose.

As with any contract, the fine print should be read, perhaps by your legal counsel, to ensure understanding of things like coverage exclusions and who it covers (e.g. does it cover lower-level committee members and “accidental” fiduciaries?).

In addition to preparing for the unanticipated, purchasing or funding this coverage for your fiduciaries can serve to put them at ease and make it easier for you to recruit committee members.  Note that in many cases, premiums for this insurance may be paid from the plan.

Take some time today to be better prepared with your retirement plan.  And keep following us for more tips.

Check out a summary of our previous 401(k) tips here!

Scott Gehman, ERPA, CEBS
Retirement Plan Consultant