The must do's, should do's and don't do's for maximum effectiveness in minimal time.
Defined contribution or 401(k) plans are supposed to be cheaper and simpler to run than traditional pension plans. But, as anyone who has oversight responsibility for a 401(k) plan can tell you, simpler does not mean easy. The rules and regulations governing 401(k)s are complex and comprehensive, and small mistakes in administering these plans can result in hours of painstaking remedial work, if not government fines and penalties. The job is particularly challenging for those who work at small to midsized companies where oversight responsibility often is shouldered by senior financial and accounting executives or human resources professionals who wear many other hats.
Just because a company is smaller does not mean the responsibilities are less, said Mark Friedman, senior vice president at North Carolina-based UAI Technology Inc., which runs pension plan management and educational conferences for plan sponsors and participants. Juggling these tasks is very tough, he said.
The first task in managing a 401(k) plan when it is not your sole responsibility is understanding what you're dealing with. Managing a 401(k) plan involves four basic components:
The legal work. Setting up and designing the plan, filing the appropriate forms with the Internal Revenue Service and the Department of Labor, conducting tests to make sure your plan is in compliance with regulations, and keeping up on legal and regulatory changes.
- The administrative work. Handling participant enrollment, loans, investment changes, withdrawals, terminations and other life events in terms of recordkeeping and transferring moneys.
Investment management oversight. Monitoring the performance of the investment options and making appropriate changes when necessary.
Participant communications. Educating participants about the plan's features and investing in general.
Managing these four components in an efficient manner requires a variety of strategies that, while not unique to part-time managers, take on particular importance in this situation.
Prioritize your responsibilities. Besides serving as his company's chief financial officer, Friedman also has oversight responsibility for the two defined contribution plans at his company. I look at two different areas, he says, the legal requirements and communications with participants. Specifically, he argues that the legal work requires top priority. If you don't pay close attention to this area, you can get in a lot of trouble, he said.
The legal work in a 401(k) plan involves filing Form 5500 or 5500C (for companies with under 100 participants) with the IRS, which then passes it on to the Labor Department. This is the plan's annual report to the government. You'll also need to distribute a summary annual report to participants and provide end-of-the-year tax forms to participants and the IRS, noted Friedman. Finally, you'll have to conduct a raft of quantitative tests on the plan to make sure it is in compliance with nondiscrimination and coverage regulations, which are designed to ensure all employees are treated fairly by the plan.
Outsource as much as possible. Bundled service providers such as big mutual fund and insurance companies roll up most of the components of managing a 401(k) plan in a single package. Not only do they provide money management services, but they also handle the single biggest job in managing a 401(k) plan — participant services, says David Huntley, principal at HR Investment Consultants in Baltimore. The vast majority of companies that offer 401(k) plans are not in the business of providing customer service, and therefore should look to delegate this responsibility to someone whose primary business it is, he notes. This involves handling transaction and information requests from employees and keeping track of accounts. The development of voice response and imaging technology now allows these providers to serve plans as small as $5 million to $10 million in assets, says Huntley. The service generally costs $25 to $30 per participant, although it can go higher.
These service providers also offer participant communications programs, compliance testing and regulatory forms. Basically, they will provide you with a data sheet for Form 5500 to a degree that it is signature-ready, Huntley noted.
There's no need to build an empire out of the 401(k) plan, he said. You want to manage the plan, not operate it.
Hire a good recordkeeper. If you can't afford a bundled service provider, hire a good recordkeeper. These companies provide a critical service in terms of helping coordinate many of the functions of managing a 401(k) plan, noted Stephen Spradling, director of human resources at CEM Corp. of Matthews, N.C. Not only will they handle all the documentation and customer service needs of the plan, but a good recordkeeper should also be able to serve as an advisor. Indeed, many recordkeepers are affiliated with benefits consulting firms. The primary function they do not fulfill is managing the money.
Often recordkeepers also provide their clients with newsletters or bulletins to keep them up to date on changes in regulations, and they should be able to handle compliance testing.
Be particular in choosing a service provider. Because mistakes take longer to uncover when a person with oversight responsibility for the plan also has other jobs, the quality of a service provider is especially important, according to David Wray, president of the Profit Sharing/ 401(k) Council of America. These are the people you're going to be relying on, he said. The time and effort it takes to hire someone experienced and skillful will be rewarded many, many times down the road, he said.
Delegate responsibility within your own company. Use your whole company structure effectively, added Wray. Lean on in-house counsel to help write plan documents or advise you on how the plan should operate. The accounting department can be relied upon to assist in auditing the plan and reconciling data between the company and your service providers. Understand that your payroll department will be key to the smooth functioning of your plan. Make sure the interface between that department or your payroll provider and your outside service providers is running smoothly, said Friedman.
Don't put a plan in place that requires substantial work if you can't outsource major aspects of the plan or if you don't have substantial human or financial resources to throw at the plan, Friedman adds. Daily investment changes and loan availability may be attractive options, but they require additional time and staff to properly execute. You have to look at what resources you have, said Friedman. It's better to have a well-run simple plan than a complex plan that does not work, he said. If the plan's administration is poor, participants will question the value of the plan itself, notes Spradling.
Set up standardized forms and documented procedures. This will make your job easier and protect you in the case of audits or lawsuits. If you are audited or are the subject of a lawsuit, the first thing you'll be asked for are your forms and procedures, noted Richard J. Wellner, vice president at Aon Consulting Inc. in Charlotte, N.C. If you don't have them, you're dead, he said. What he is referring to are standardized documents and documented procedures for handling participant accounts and monitoring investment managers.
Because there is a tremendous amount of paperwork and recordkeeping involved in managing a 401(k) plan, it is critical that it be organized, adds Friedman. He suggests setting up standardized forms for enrollment, loans, disbursements, hardship withdrawals and changes of investments, among others. Then, organize all these documents and file them based on categories such as IRS and Labor Department filings, plan documents, participant elections, and investment information.
Read up on the subject and network with others in your position by attending conferences. The key difference between people who run 401(k) plans on a full-time basis and those who don't is that the former tend to be more experienced in the area. Those who have other responsibilities need detailed information and knowledge, and the best places to acquire that information is at conferences and in books, say consultants.
Remember, Friedman says, no matter how much you delegate or outsource, the ultimate responsibility for the plan is yours.
Next month: Where to go for information about part-time plan management and common mistakes to avoid.