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Is your 401(k) plan in compliance?

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Is your 401(k) plan in compliance?


Secure 2 Act Small business MISECURE 2.0 and new state mandates concerning retirement plans have meant big changes for employers over the last few years. One key result is new retirement plan adoption. An April 2023 Pew report shows that, on a state-by-state basis, the average share of new employer-sponsored plans is higher after states’ requirements went into effect and the state-sponsored IRA began enrolling workers. Since SECURE 2.0 was signed into law in December 2022, according to internal data, Human Interest has seen nearly 70% growth in customers looking to sponsor retirement plans, almost half of which were first-time plans. Cerulli Associates anticipates a surge in 401(k) plans to continue, projecting more than 900,000 by 2028, or roughly 230,000 more than there were in 2022. This rapid growth is great news: It means greater access to end-of-career options for so many Americans.

However, research among the businesses that Human Interest supports shows that complying with legislation consistently ranks as a top concern for plan sponsors. Wading into the world of plan sponsorship means learning new rules from the Department of Labor (DOL) and the Internal Revenue Service (IRS) to ensure compliance. And like the IRS with taxes, the DOL conducts regular audits of retirement plans. It does so through the Employee Benefits Security Administration (EBSA). According to the EBSA’s annual fact sheets, the 5-year average for funds recovered by EBSA investigations which includes audits of 401(k) plans is $573.5 million (FY2019-FY2023). In each of those years, more than 65% of investigations included some type of corrective action or monetary return.

Labor advocates should celebrate this work on EBSA’s part. The monetary returns reflect hard-working Americans getting their earnings recovered. In the FY2023 report, the EBSA team notes that “many workers in lower-paying positions may go from job to job, which often results in losing track of retirement savings accounts. In addition, companies that go out of business or are bought out may have accounts that also get lost in the shuffle.” Audits and corrective action particularly help those who may need their retirement benefits the most. Still, being the subject of an audit or investigation can induce some heartburn for the business owner, plan sponsor or the HR team responsible for responding to EBSA’s requests.

The good news is that preparing for the possibility of a DOL audit is not too difficult to do. Follow these best practices, and your HR leadership team will be well-positioned if the EBSA reaches out.

Best practice #1: Conduct a self-audit

The best thing you can do when preparing for the possibility of an audit is to run one in-house. Look at your plan documents, participant notices, contribution and distribution reports, plan policies, procedures, timing, reporting, and limits. Take a thorough look for any red flags or issues. If you notice errors, correct them as soon as possible. Common errors to watch out for are:

  • late deposits of employee contributions into the plan,
  • failure to implement employee deferral elections and
  • failure to provide required notices.

The IRS provides the Employee Plans Compliance Resolution System (EPCRS) to help you fix any mistakes and avoid the consequences of plan disqualification. As you work through the EPCRS process, take detailed notes about the issue and relevant dates surrounding its correction. That way, if the DOL uncovers the error, you have evidence to show that everything has been – or is being – addressed.

Best practice #2: Document all decisions

It is the responsibility of a plan provider to select the funds a participant can choose from, even when offering plans in which the participants select their own investments. The law requires that plan providers use a “prudent process” when selecting funds, and if participants feel that an investment is not the best option, they may make allegations of a fiduciary breach. If this allegation is made, a plan provider must prove their prudent process.

To prepare for this possibility, complete an investment policy statement (IPS) that details how investments made available in the plan are selected and monitored. Include information about alternative investments and the company’s stance regarding them. Also, take detailed notes and meeting minutes when investment decisions are discussed and log those with your IPS. While not a legal requirement, these steps should serve to sufficiently prove a prudent process.

Best practice #3: Keep records organized

One of the chief costs of an audit is time. While this is especially relevant for smaller HR teams, losing time to an audit can significantly set productivity back for any organization. One way to reduce the time tax of managing the audit process for your HR or other leadership teams is to have detailed, organized records always on hand and up-to-date. Keep plan records, payroll reports from your payroll provider, and the above prudent process reports in a secure place that the plan administrator and other key company leaders can access.

Best practice #4: Look into audit support

There are several avenues for finding help in the case of a DOL audit. Certain attorneys and CPAs specialize in managing an audit and some 401(k) providers have resources to support those going through an audit. Even if you are not dealing with an audit yet, it is good to collect the names of companies, law firms, and other resources to prepare. Ask your 401(k) provider what information and help it provides in the case of an audit. You can keep this information and any relevant contact information with your other documentation, so you have one place to turn if the EBSA reaches out.

A Department of Labor audit of your 401(k) plan does not have to be as scary as it seems. In light of SECURE 2.0 and state mandates from recent years, more businesses across the country are providing retirement options to their workers. This key benefit helps hardworking people build security for their futures, which is the ultimate goal for the governing bodies conducting audits. If you stay organized, follow a prudent process for plan selection, and check for errors internally, you will be ready in case they call.



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