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Watch Your Step: 6 Pitfalls That Can Trip Up Retirement Plans and the CFOs Who Run Them

6 Pitfalls That Can Trip Up Retirement Plans

Offering retirement benefits can be an attractive plus for attracting and keeping employees, but they can raise serious issues if you don’t follow certain rules. Not only can missteps result in significant consequences to the overall plan, such as the loss of tax-favored status to employees and a loss of tax deductions for plan sponsors, but plan fiduciaries could face personal liability as well.

CFOs involved in retirement plans need to ensure their companies aren’t making the following mistakes.

MISTAKE 1. The plan’s fiduciaries don’t have defined roles and responsibilities. According to the Employee Retirement Income Security Act (ERISA), the statute that governs employee benefit plans, fiduciaries have increased responsibilities, and potential liability, for the management and administration of their plan. A fiduciary is one who serves any of the following functions:

  • Has discretionary authority or control with respect to plan management or the disposition of plan assets.
  • Provides investment advice for a fee.
  • Has discretionary authority or responsibility for plan administration.

Carlos Panksep, managing director of the Centre for Fiduciary Excellence, advises that “plan sponsors should have clearly defined roles and responsibilities for all of the parties associated with the plan, including advisers, the investment committee, and the administration committee. These should be set forth in writing and include a signed acknowledgment of fiduciary status.”

Fiduciary duties include:

  • Acting solely in the best interest of plan participants and their beneficiaries.
  • Carrying out duties in a prudent manner.
  • Following plan documents unless the documents are inconsistent with ERISA.
  • Diversifying plan investments.
  • Paying only plan expenses that are reasonable.

MISTAKE 2: Plans are missing an investment policy statement. Such statements can potentially shield fiduciaries from liability when they have followed its terms. “The investment policy statement should be the bible for a retirement plan’s investments,” Panksep says. “It dictates how investments should be managed and how decisions should be made.”

MISTAKE 3: Fiduciaries lose track of disclosures from service providers. According to ERISA, plan fiduciaries must act prudently and solely in the interest of the plan’s participants and beneficiaries when selecting and monitoring service providers and investments. In other words, they have to pay attention to changes in the service providers' policies and make sure the plan doesn't overpay for services at any one time. Panksep says, “Plans have a responsibility to make investment decisions based on the disclosures that have been provided by the service providers. They need to determine if the service provider is charging reasonable fees for the services being provided."

MISTAKE 4: Participants aren’t getting the information they need about fees. Plan participants must be given specific information about the fees and expenses of the underlying investments held by their plan. This fairly new requirement, again under ERISA, was adopted because participants are generally unaware of the fees associated with particular investment options, which over time can erode the amounts in their retirement accounts.

MISTAKE 5: Documentation is a mess or has missing parts. Henry Talavera, a shareholder in the law firm of Polsinelli PC, warns that “without all required plan amendments, any IRS audit could be fraught with peril. Plan sponsors should be vigilant and make sure all of their plan documentation is in order.”

Further, ERISA requires that certain provisions be included in plan documents. To make sure their documents aren’t in violation of ERISA, plan sponsors can ask the IRS to review them. After the IRS has signed off on the plan documentation, it typically issues what is called a determination letter. A company needs to know what type of plan it has because of the significant difference between a prototype plan and an individually designed plan. A prototype plan is one that third-party providers, like Fidelity and Vanguard, offer employers. These plans typically consist of an adoption agreement and a base plan document. An individually designed plan is written for one employer only and is a stand-alone document.

Talavera says that the IRS has, for the most part, stopped issuing determination letters for prototype plans. “Without a determination letter, there is an increased burden on plan sponsors to make sure all legally required and other discretionary amendments have been timely signed since perhaps the plan’s inception,” he says. “Further, for merged plans, it becomes critical for plan sponsors to retain all appropriate plan documentation and amendments prior to any merger.”

MISTAKE 6: Fiduciaries break the rules for amendments. Plan sponsors generally can’t adopt discretionary plan amendments that are effective retroactively to a date prior to the current plan year. An example of when an amendment might be needed, Talavera notes, arises with so-called ERISA accounts. With the new fee disclosure requirements, third-party administrators/insurers have been reducing the fees charged to plans. However, those same third-party entities have entered into administrative contracts with plan sponsors that will issue rebates to the plan if a particular mutual fund generates revenue that exceeds the administrative costs to the plan. These excess amounts have been allocated to ERISA accounts and then filtered back to plan participants (or perhaps, in the right situation, back to the plan sponsor directly).

Talavera warns that there is a controversy over whether a plan amendment is needed to allocate any such rebates from an ERISA account back to plan participants. “Many prototype plans do not have provisions addressing the allocation of amounts in an ERISA account, and based upon our informal conversations with the IRS, the lack of an amendment may be a qualification issue,” he says. “This creates a challenge for plan sponsors because, among other reasons, the IRS will not generally issue a determination letter on a prototype plan, so plan sponsors may have a difficult time addressing this issue with certainty.”

Kandice Bridges is a freelance writer specializing in issues related to business, legal, tax, retirement, executive compensation, and women in executive leadership. She can be found at For another article by Bridges on Proformative, see Have You Misclassified Your Workers? IRS Will Help, But There’s a Catch.