Beach Ready 401(k) Plan
Summer is here! Most of us have spent our time since New Year ’s keeping resolutions to finally get ourselves “beach ready.” Now the kids are out of school, vacations are on the horizon, pools are open and the heat is on. All of these make it difficult to muster the will to work and may even distract plan sponsors from the administration of their 401(k) plan. However, this time of year is the best time to dig into their retirement plan and ascertain which pieces need to be whipped into shape!
Beginning about this time each year, TriStar schedules Plan Valuation meetings with our clients. These meetings serve to provide a deeper look at each plan once the annual census project is complete and the annual plan valuation and Form 5500 are prepared. During our annual administration process, we review and monitor a company’s basic census data, vesting, contributions and perform required discrimination and coverage testing. We cross-compare all the data we receive to the company’s W-3 to ensure there are no discrepancies and provide a report of our findings. During the plan valuation meeting, we take time with our clients to review the results of our review and reconciliation and we provide our clients with any suggestions for enhancements that they should consider making to the plan.
Deposit Corrections (Lost Earnings)
One of the most common issues that we discover during our preparation of the annual plan valuation is employee deferral contribution deposit errors. The employer is responsible for timely depositing all of their employees’ salary deferrals into the plan. The deferrals are required to be deposited as soon as administratively feasible after they are withheld. For small plans, the Department of Labor has given a safe harbor of 7 business days to be considered timely deposited. For large plans (over 100 participants), there is no safe harbor and they generally consider two to three business days to be more than reasonable.
Once we uncover this type of error, we whip the plan back in shape as soon as possible by following the procedures laid out by the IRS in their Employee Plans Compliance Resolution System (EPCRS). We will calculate lost earnings as required and provide the amount of deposits needed to make the participants whole. Those amounts are then deposited into the plan trust, and the deposit procedure is reviewed and corrected by the plan sponsor. The plan sponsor must also file a Form 5330 for the excise tax on the prohibited transaction that took place when the deferrals were not timely deposited.
Loans and Hardships
On the upside, offering loans and hardships to the participants in your 401(k) plan can increase participation. On the downside, loans and hardships take a heavy toll on plan funds, and take an even heavier toll on your participants’ retirement savings. According to Greg McBride, Chief Financial Analyst for Bankrate.com, unless the money is repaid quickly, the loan represents a permanent setback to retirement savings. Our general rule of thumb is to exclude loans from the 401(k) plan to protect the plan trust and to dissuade participants from ravaging their retirement savings.
If too many participants are taking loans from the 401(k) plan, it may be time to remove this option.
Unlike loans, adding a designated Roth contribution option has virtually no downside for the plan sponsor or the participants. This option allows each individual participant the additional option of making salary deferral contributions as after-tax contributions into the designated Roth account where they will grow tax free instead of tax deferred. They may also decide to split their salary deferrals between both Roth and the traditional pre-tax salary deferral.
We encourage the financial advisor of the 401(k) plan to join us for the plan valuation meetings to encourage open discussion about all aspects of the plan. These meetings provide the financial advisor the opportunity to review investments with the plan sponsor and benchmark the fund line up against other funds. If a specific fund is under performing, the financial advisor will provide options to replace it.
We find throughout the year, participants need a refresher about the 401(k) plan not only as a reminder to contribute in the plan, but also as a learning session on their savings strategy. Your advisor can schedule an education meeting to explain the benefits of the 401(k) plan to employees, and answer questions about the plan that may otherwise go unaddressed.
Let’s get your 401(k) ready for summer together! Have questions about plan valuation meetings, or how to optimize your 401(k) plan to ensure it’s running at peak performance? Give us a call at 405-848-401k! Visit us at www.tristarpension.com for more information.