Employer Responsibilities Regarding 401(k) Plans

Offering a variety of competitive benefit plans (EBPs) has become a necessity for employers to attract and retain talent. Because of the cost and complexities of traditional pension plans, the 401(k) plan has become the most common type of employer-sponsored retirement plan. Sponsoring a 401(k) plan is straightforward, but employers need to be aware of the responsibilities as well as the potential liabilities for non-compliance with Department of Labor (DOL) and Internal Revenue Service (IRS) regulations.

Employers, including members of management, officers, and members of the board of directors, assume a fiduciary obligation to the employees that participate in a qualified retirement plan. The IRS defines a fiduciary as “a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity” – which means people associated with a 401(k) plan must always look out for the best interests of the participants.

Most 401(k) plan sponsors hire an administrator, an investment advisor, and an auditor to assist in the management of the plan. Hiring third party professionals does not alleviate the employer from liability in the event of compliance issues.

R&A performs audits of dozens of 401(k) plans and we frequently encounter compliance issues. Some of the most common issues include:

Untimely Remittance of Employee Contributions.

The DOL’s guidance on timely remittances can be misinterpreted by employers which causes inadvertent late remittances to the plan. Employee contributions are deducted from paychecks each pay period and must be remitted to the plan as soon as amounts are known and segregated, but in no event more than 15 days from the date of the payroll. Many employers interpret the 15 days as a safe harbor, which is not true. A good rule of thumb for employers is to make remittances to the plan on the same date as the payroll taxes are submitted to the IRS. Remittances made after that date run the risk of being declared late and causing compliance issues.

Prohibited Transactions

Employers are not allowed to enter transactions with the plan such as sale, exchange, or lease of property, loans, furnishing goods or services in exchange for fees, transfers of plan assets, and charging administrative or investment management fees. Employers lose all control over the funds remitted to a qualified plan and must not engage in any transactions that do not benefit the participants.

Excessive Fees

Thanks to a successful Supreme Court Case, litigation against 401(k) plans alleging excessive fees has become a cottage industry for some industrious law firms. According to 401k Specialist, over 170 lawsuits challenging retirement plan fees have been filed since 2020. In most of these cases the employers were not aware the fees being paid to investment advisors were excessive. To protect against this type of liability it is recommended plans perform some due diligence from time to time and benchmark their plan’s fees against plans in general and plans of similar size with comparable investment options.

Plan Filings and Disclosures

While the required disclosures and annual filings for 401(k) plans are not onerous, employers frequently miss required filings and disclosure deadlines. On an annual basis, the plan must file a form 5500 with the IRS 7 months after the plan year end or ten and a half months with an extension. Plans with 100 or more participants must attach audited financial statements to the Form 5500 for the filing to be valid. Failure to timely file Form 5500 could result in penalties of up to $2,400 per day.

In addition to the annual Form 5500, employers must provide information to participants on a regular basis. New plan participants must receive a Summary Plan Description (SPD) no later than 90 days after joining the plan. Every 5 years an updated SPD should be provided to all participants. On an annual basis employers must provide a Summary Annual Report (SAR) to all participants. Each participant should also be provided a statement of their individual account on a quarterly basis. Generally, these filings are the responsibility of the plan administrator. However, employers must ensure the plan administrator is complying with the various filing and disclosure requirements.

Summary

Sponsoring a 401(k) plan is important for recruiting and retaining employees. The requirements for employers are reasonable but officers and directors should be aware of their fiduciary responsibilities to avoid penalties and other liabilities resulting from non-compliance. R&A provides audit services to dozens of 401(k) plans and can assist with questions or concerns about compliance issues. For more information, contact R&A.

About this Author

John’s experience is concentrated in financial reporting and strategic planning for entities ranging from small and medium sized businesses to multi-national publicly traded companies.