401(k) administrators, we salute you.
Because if you’re responsible for 401(k) administration, you are accepting a significant amount of responsibility and personal liability. From tracking eligibility to managing loans to dealing with distributions, many business owners are unable to comply with all of the 401(k) rules – in fact, 66% of investigations opened by the DOL in 2022 ended with enforcement actions which resulted in $900M in recoveries.
In this post, we’ll summarize what you need to know to manage your 401(k) as efficiently and painlessly as possible – the work, why it matters, and tips to keep your plan running smoothly.
However, if you are short on time and already know that you don’t have the bandwidth to read 200+ pages of ERISA to become a 401(k) compliance expert - you can hire an independent 3(16) fiduciary to perform much or all of your day-to-day administrative duties.
401(k) Administration: Your Responsibilities
401(k) administration is the process of maintaining a retirement plan and keeping it compliant with the Employee Retirement Income Security Act of 1974 (ERISA). Generally, most administrative duties where an administrator can exercise discretion automatically make them a fiduciary of the plan (and legally liable for any mistakes). For example, if you evaluate and approve a rollover - your review of the plan documents and conclusion that the rollover complies with plan rules, may make you a fiduciary.
Basically, most of the day-to-day administrative tasks that keep the 401(k) running and annual compliance likely have some aspect of fiduciary responsiblity. To help keep things as simple as possible (not an easy task, we might add), we’ll break the work into two types: ongoing administration, and annual compliance.
Every time a new employee joins the company, you need to determine when they will become eligible for 401(k) participation and then send notification of their impending eligibility (and the details on it) before enrollment takes effect.
Failing to process enrollments or send eligibility notifications can have serious consequences. For example, failing to enroll an employee on time may require having to make a corrective contribution equal to 50% of their missed deferral opportunity.
In fact, the Department of Labor collected over $1.4B in penalties, fines and recoveries in 2022 alone.
Deposits are the lifeblood of your 401(k) plan. Every time you run payroll, you generally need to deposit deferrals (and any company contribution) within 5 days (or less). If you are late, you may be on the hook for penalties and lost earnings, file Form 5330, and pay an excise tax to the IRS.
When an employee wants to change how much they defer, they’ll go to your 401(k) provider's website and change their deferral percentage. When this happens, you need to update this deferral percentage in payroll before your next payroll cycle. If this doesn’t happen and the wrong amount is deferred, one of two things could happen:
1. Invalid Deferral: If too much is deferred from the employee’s paycheck, you’ll need to run a payroll reversal, refund the money to the employee, and document the correction.
2. Missed Deferral Opportunity: If too little is deferred, you may need to make a corrective contribution to compensate the employee for what they would’ve deferred (and the company match) had the rate been correct. This can get really expensive.
Every time a plan participant requests a 401(k) loan, as the administrator you have to review, approve, and document the loan request, then set up the loan repayments as additional withholdings in payroll.
Many payroll systems aren’t built to handle 401(k) loans, so mistakes are common. Here are the biggest ones:
1. Loan Overpayment: If you don’t stop a plan participant’s repayment withholdings after they’ve paid off the loan, you’ll need to run a payroll reversal, refund their money, and document the correction.
2. Missed Loan Repayment: If your failure to set up loan repayments on time or correctly causes a missed payment, your company may have to make the repayment on the participant’s behalf.
3. Loan Default: This is a big one. If the participant’s loan defaults due to an administrative error on your part, your company may have to repay the entire remaining balance on the loan.
As a plan administrator, one of the most important ongoing tasks you’ll deal with is overseeing the timely distribution of required notices, which exist for... well... just about everything related to a 401(k).
Failing to send these required notices on time has consequences, from $100+ daily penalties to full plan disqualification.
You will also be responsible for reviewing, approving and documenting any rollovers into or out of the plan, any distributions (e.g., loans or hardship withdrawals, etc.) and approving any domestic relations orders when an employee get’s divorced.
Mismatched data between your payroll and 401(k) provider can lead to delays in approving these transactions, which is a great way to encourage employee complaints to the Department of Labor.
Employees come and go, and when they leave, it’s one of the plan administrator’s duties to transfer assets to a new plan or issue a lump sum cash distribution. The employee may also be able to keep their assets in the plan.
These are all the tasks that have to be performed after each plan year to ensure everything is in compliance with IRS and DoL regulations.
If you made any mistakes during your Ongoing Administration, they should show up during these end-of-year processes (and will have to be corrected) - starting with the Year-End Census.
The Year-end census is a report of all the plan and participant data you’ll use to conduct your required nondiscrimination tests.
Because you need the Year-End Census for non-discrimination testing, getting this done late could lead to late NDTs, which could mean - you guessed it - more penalties!
Nondiscrimination testing is mandatory annual testing to ensure that 401(k) retirement plans benefit all your employees, (not just the business owners or highly-paid employees).
If you fail your NDTs, you’ll have to make corrective distributions, or contributions called QNECs or QMACs. Failed tests can be expensive, but more than anything else, they’re a huge hassle for everyone involved.
The Large Plan Audit is the annual compliance review process required for all “large” 401(k) plans*. This involves pulling reports, gathering documents, and lots of back-and-forth with auditors. It typically costs between $8,000 and $15,000 - potentially more if your plan is on the complex side.
The auditor is looking for any discrepancies, which require documentation, correction, and (surprise!) likely financial penalties.
*Over 100 participants.
Form 5500 is a detailed annual overview of the plan - due seven months after the plan end date each year, and the ultimate piece of 401(k) plan administration - literally and figuratively.
Not only is it the last major piece of administration work you do for the plan year, but getting it right is also one of the single most important parts of managing a 401(k) plan.
The IRS reviews the Form 5500, and they may report errors to the Department of Labor. Mistakes, omissions, or patterns of mismanagement on Form 5500 are likely triggers for a government audit of the 401(k) plan.
We know. We just covered an overwhelming amount of work.
But don’t stress too much, because now we’ll get to some tips for painless plan management.
Mistakes are how we learn. But if there’s one place you don’t want to make mistakes, it’s in 401(k) administration.
Even the smallest mistakes, like forgetting to update a deferral rate for just one employee, can end up costing you a lot. And even if the penalty isn’t significant, one mistake still creates hassle during your 401(k) audit. So if you want 401(k) administration to cause you as little pain as possible? Don’t make mistakes.
Plan design refers to all the rules and features of your retirement plan - laid out in the 401(k) plan documents (including your Adoption Agreement and 401(k) Summary Plan Description).
Simplifying these rules can dramatically cut down on your administrative workload. For example, simplifying your eligibility requirements can significantly cut down on how much time you have to spend pulling eligibility tracking reports, sending notices, and enrolling employees.
When it comes to 401(k) administration, nearly every process depends on information being consistent between your payroll system and your 401(k) provider. Contributions, eligibility tracking, 401(k) loan maintenance — all of these processes and more depend on moving data from one system to another.
Doing any of this manually is likely to result in mistakes, so why not automate the process? A lot of companies now offer integrations between your payroll and 401(k) provider. Synchronizing these systems could reduce hassle, and compliance risk.
401(k) auditors agree: One of the biggest time sinks in the large plan audit for plan sponsors is having to spend hours digging up documents and data. That’s why they recommend electronic storage. Having everything organized in one, easy-to-reach place saves you hours during your annual audit, and can save you the hassle and reduces potential fines.
As the plan sponsor, 401(k) administration mistakes are legally your responsibility. That means you might be on the hook for thousands (if not hundreds of thousands of dollars from plan errors).
Luckily, you are not required to do all the work yourself - in fact the Department of Labor allows (and arguably encourages) administrators to retain outside fiduciaries if they do not have the time or expertise to administer the plan. A 3(16) fiduciary can take on both your administrative burdens and the liability for any mistakes that result from their work.
You want to provide retirement benefits to help your employees, not create extra work for yourself. So, we understand how stressful it is to think of all the penalties for not managing their benefits perfectly. In a system where even honest mistakes and minor typos can bring major financial penalties, it’s easy to get overwhelmed.
ForUsAll is here to help!
We’ve created an all-in-one administration & compliance solution that takes almost all of the aforementioned work off your plate. On top of that, we are legally responsible (and liable) for making sure your plan is administered correctly.
Schedule a quick, 10-minute demo today to learn how you can save time and keep your plan compliant with ForUsAll.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
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