It is never a bad idea to review your retirement plan and how effectively it is working. Whether your plan needs an audit or not, you should review the common mistakes we often find and consider whether they might be a potential issue occurring in your employee retirement plans.
Here are some of the common mistakes we see in retirement plans:
- Late Contributions – It is imperative to review the timeliness of your company’s remittance of employee contribution transmittals. Once employee contributions are withheld from an employee’s pay, they should be submitted to your third-party administrators funds as soon as reasonably possible. For example: If your company consistently demonstrates that employee contributions can be remitted in three business days, then this should be your company’s standard. As a result, any remittance after this standard should be considered late. To gain a better understanding of the implications and importance of having a timely standard for contribution remittance, you can check out my last article Late Retirement Plan Contributions and What to Do About Them.
- Improper Calculation of Vesting – Vesting calculation metrics should always agree with your plan documents. A company may either use hours of service or years of service to define an employees’ vesting. A third party administrator might not be allocating the appropriate credits for years of service to a participant. Instead of assuming your third party administrator is doing this correctly, it can be beneficial to periodically double check a participant’s forfeiture calculations. Also ensure you understand your company’s role in this process. As the plan sponsor, providing the correct data is critical. Make sure accurate records are maintained at your office to help determine employee’s dates of service for vesting calculations.
- Plan Compensation – It is important to follow the definition of compensation per your plan documents. Not all wages are considered compensation. Some plans will exclude certain items from pay like bonuses, severance pay, and more. When an employee elects to have employee contributions withheld from their pay for their retirement contribution plan, you will need to determine what this number would be in relation to their total compensation for the period.
- Minutes of the Meetings – Documenting meetings is a critical step in the process of running a retirement plan. It is beneficial to keep record of the discussions revolving around funds being considered, issues possibly discussed about the plan, and any general activity. These records allow for an organization to follow up on concerns, trace the origin of plan policy decisions, and mitigate unexpected changes. Investment failures occur within many retirement plans, so it is important to track oversight being exercised.
- Segregation of duties – An employee that is responsible for authorizing, processing, transmitting, and recording payroll should not be directly engaged with the transmission of retirement contributions to the third-party administrator. Instead, information should be passed through a minimum of two employees. Having segregation of duties can create a system of checks and balances to help mitigate mistakes. Without a separation of responsibilities, the opportunity for fraud is heightened.
- Employee Contribution Withholdings – At a minimum, the plan sponsor should be comparing yearly total employee contribution amounts withheld from payroll to the third-party administrator's records. This task can be completed in minutes and ensures that all the money withheld from payroll was remitted to the third party administrator during the year. Additionally, a bank reconciliation would help verify whether employee contribution transmittals are being withdrawn and applied to the plan correctly. Doing this would be reconciling on a plan level. If you want to test on the participant level, trace an employee’s contribution deferrals withheld from pay for the year to their participant statement.
Lastly, never forget your oversight is required as the plan sponsor, no matter what is outsourced!