You've taken the time to establish a retirement plan for your business. That puts you ahead of the vast majority of small business owners. Now you need to know your responsibilities as a plan sponsor.
The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) each set forth specific requirements for employers to follow when administering and maintaining their employer-sponsored retirement plans. Current increased scrutiny of corporate practices means that employers should be diligent in meeting their legal responsibilities as plan sponsor. Failure to do so could result in hefty penalties.
One effective way to ensure you comply with ERISA and IRC requirements is to review your plan annually with a “compliance checklist.” The following list includes many of the things you should consider each year, but it's important to develop a list that's tailored to your own business needs and the requirements of your specific retirement plan.
Plan design and documentation
If you plan to make any changes to your plan documents, you need to make sure that the new documentation adheres to applicable laws and regulations. Traditionally, this has meant hiring an attorney qualified to draft any necessary papers. Plan sponsors can use prototype plan and trust documents that have been approved by the Internal Revenue Service (IRS). Prototype documents minimize the time and expense of drafting an individually designed plan and provide assurance that the plan complies with IRC requirements. If you choose to have an attorney draft an individually designed plan, you will have to submit the plan to the IRS for approval.
Timely and accurate record keeping and administration
Depending on the requirements for the type and size of retirement plan you sponsor, you should make sure you are periodically sending account information to participants, filing annual reports (such as Form 5500) with government agencies, depositing participants' deferrals in a timely manner, and distributing benefits to participants or beneficiaries.
Trustee services
To reduce your fiduciary risk, consider retaining an independent plan trustee in the coming year to perform functions such as custody and control of plan assets, trust accounting and cash management.
Nondiscrimination Testing
If required for your type of retirement plan, you should make sure you are testing annually to ensure that certain employees do not unfairly benefit from the plan. Appropriate action must be taken if your plan does not satisfy testing requirements.
Insurance
In accordance with ERISA, plan fiduciaries and persons handling plan assets generally must be bonded for an amount equal to not less than 10% of the funds handled. The minimum bond is $1,000; the maximum bond generally is $500,000. If you believe you are not in compliance, you should contact your business insurance broker to discuss your current coverage.
Employee communication and education
Good communication can help employees make appropriate investment choices and increases the likelihood of their participation. If you are not already doing so, you may wish to offer pre-enrollment and enrollment communications, education seminars, individual counseling, plan statements and newsletters. Additionally, if applicable to your type of retirement plan, you should make sure that participants have a current copy of the plan's Summary Plan Description (SPD).
Investment management
If you haven't already done so, you may want to consider establishing a written plan investment policy. Make sure your plan investment fiduciary follows the plan and carefully monitors plan investments. When necessary, revise the policy to ensure that plan fees and expenses remain reasonable. In certain types of plans, sponsors may elect to give participants control of investment decisions relating to plan assets. If the plan meets certain operational and structural requirements, the plan sponsor may not be responsible for investment decisions made by participants.
Alternatively, it may make sense based on your type of retirement plan and its asset level to consider a managed money service. Managed money services assume responsibility for day-to-day investment decisions and offer the expertise, experience and resources necessary to invest in a disciplined manner. By opting for a managed money service, you may be able to simplify some of your plan oversight responsibilities.
Protecting yourself
Benefit plan sponsors and plan fiduciaries can be the target of class action lawsuits. Most legal action can be avoided by taking the necessary precautions to ensure a plan is in compliance with the law. It's not enough to take those precautions just once – at the time you set up the plan. Compliance is an ongoing responsibility.
As an added bonus, performing a regular checkup of your plan can help you maximize the tax advantages. This approach also gives you an opportunity to reevaluate your plan’s fees and investment performance annually to ensure you are still receiving the best value.