A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Last week, we discussed four of the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD's failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan's definition of compensation.

On Thursday, we discussed delinquent contributions.

We hope you enjoyed this refresher on best compliance practices.  For our last post in this five-part series, we discuss a topic that never goes out of style…

Plan Governance

Description

Plan governance generally encompasses the oversight policies and procedures that plans enact to ensure good process and operational compliance. The following discussion addresses two specific aspects of plan governance—those which are among the most commonly neglected.  Fortunately, these requirements for good plan governance are also extremely easy to satisfy.

Potential Liability

Errors stemming from poor plan governance can result in plan operational failures with potential consequences ranging from minor to loss of a plan’s qualified status.  To the extent poor plan governance stems from or results in a fiduciary breach, fiduciaries may be held personally liable.

Examples

Fiduciary Training. Plan fiduciaries should receive regular and thorough training on best practices in plan governance. Common errors resulting from a failure to receive such training include failure to properly establish and engage in good process, identify and remedy mistakes, establish and follow the plan’s investment policy statement, and accurately track plan expenses.

Delegation of Authority. By properly delegating authority over certain aspects of a plan (e.g., selection of investment funds, or claims administration), a plan sponsor or other fiduciary can limit its exposure with respect to the delegated functions. Common errors arise from (i) failing to treat the delegation of authority as a fiduciary act to be conducted with the skill, care and prudence of an ERISA fiduciary, an (ii) failing to document the delegation of authority in writing.

The Fix

The best way to avoid plan governance violations is to ensure that fiduciaries are properly and regularly trained to review their responsibilities and stay abreast of any changes in the law. Depending on the facts, errors may be correctable through VFCP or EPCRS.