401(k) Compliance Check #10: Magic Words – Best Practices for 401(k) Plan SPDs

To help employers properly administer their 401(k) plans, in 2022, Foley & Lardner LLP is authoring a series of monthly “401(k) Compliance Check” newsletters. This article includes some tips for drafting a best-in- class 401(k) plan summary plan description (SPD).

In last month’s 401(k) Compliance Check, we discussed IRS limits on participant 401(k) plan contributions and how to address contributions that exceed those limits.  This month we provide some best practices for drafting a 401(k) plan SPD.

Why is This Topic Important?

While the old adage “the plan document governs” continues to hold true, the content of your 401(k) plan SPD is very important for many reasons, including the following:

• ERISA requires plan administrators to accurately and thoroughly describe the terms of the 401(k) plan in an SPD, using plain language that plan participants can understand;
• In spite of the rule that the plan document governs participants’ rights to benefits under a 401(k) plan, courts sometimes allow participants to rely on SPDs when they are more favorable than a plan document if the participants can demonstrate that they relied on those more favorable terms or to resolve unclear plan provisions; and
• Simple language can go a long way toward supporting a plan administrator’s interpretation and application of the terms of a 401(k) plan.

What Should We Include in Our 401(k) Plan SPD?

Following the steps below will help you ensure that your SPD is not only legally compliant but also helpful to plan participants and supportive of the way that you administer the plan. 

1. Before you start on the magic words in steps two through ten below, develop and use a checklist that includes the following:
   • ERISA’s requirements for the content of an SPD. The main list of SPD requirements can be found here.
   • The rest of the below best practices; and
   • Your own best practices. For example, if your participants routinely ask questions about certain aspects of your 401(k) plan, that may be an indicator that your SPD is not properly explaining those plan provisions and needs some updating.
2. Make sure you discuss the plan administrator’s discretionary authority.
   • Your SPD should specifically state that “the plan administrator has the discretionary authority to interpret and administer, in its sole discretion, the terms of the plan, and to make factual determinations.”The important word in that sentence is “discretionary.”
   • This language, coupled with adherence to ERISA’s claims and appeals procedures, generally allows the plan administrator’s decision to receive a preferential standard of review in court.
   • This is what we’re talking about when we say magic language!
3. Clearly explain the plan’s claim filing and exhaustion rules.
   • The SPD should clearly state the rules for filing claims and appeals.
   • The SPD should state that the claims and appeals process applies not only to claims for an immediate benefit but also to clarification of rights to future benefits.
   • Consider stating that participants must exhaust the claims and appeals procedures not only for claims for specific benefits but also for claims relating to breach of fiduciary duty.
4. Include a time limit for filing a lawsuit.
   • State a deadline for filing a lawsuit after receipt of a final appeal denial.Six to twelve months after the date of the appeal denial is a common deadline.
   • Also, communicate this deadline in claims and appeals denial letters.
5. Date your SPD and include disclaimers.
   • Include in the SPD both the date it is effective and the date it was published, so that it is clear what version is relevant to a particular period of time and that you are meeting ERISA’s timing requirements for distributing updated SPDs.
   • Always explain that the SPD is just a summary and does not include every plan provision, and that the terms of the formal plan document will govern in the event of inconsistency.Consider also including a statement that the terms of the plan cannot be altered by oral communications or written communications outside of the plan document.
6. If there is a “must” or “you are required”, then explain the consequences.
   • For example, clearly explain what happens if a participant fails to opt out of automatic enrollment or escalation, fails to make investment elections, fails to name a beneficiary, misses a deadline, etc.
   • These types of explanations decrease the chances of ambiguities or allegations that a participant did not understand the consequences of failing to take timely action.
7. Address missing participants and beneficiaries and uncashed checks.
   • Explain, at least in general terms, the plan’s process for addressing missing participants and uncashed checks (e.g., uncashed checks will be forfeited and if later reinstated at participant’s request, will be reissued without interest).
   • Also, state the importance of participants and beneficiaries keeping the plan administrator informed of their address.
8. Use cross-references and other shortcuts to help participants.
   • Use a table of contents so that participants can identify all sections that may be relevant to their issue.
   • Consider a one-page quick guide at the front with key terms.
   • If language in one section is impacted by another, make sure to refer to that other section.
   • Similarly, read the entire SPD to ensure consistency (that one section doesn’t say one thing and another something different).
9. Stress the importance of cybersecurity.
   • Include a statement in the SPD about the importance of best practices when it comes to account security.
   • Consider directing participants to this list of DOL Online Security Tips.
10. State the plan’s rights with respect to overpayments and errors.
• Your SPD should explain that the plan administrator has the right to take any reasonable actions available to recover overpayments and to correct errors, or to choose not to correct errors.
• Consider a statement that it is a participant’s responsibility to check their paycheck and account statement to ensure that deferrals are being deducted from their pay correctly and that their investment elections are correct, and include a time limit on the plan’s obligation to make up for any errors relating to its mistakes in that regard (e.g., there will be no correction for errors that continue past a certain time period). This is untested, and thus, a bit controversial, but the IRS correction procedures leave an opening for this type of limit.

As part of Foley’s ongoing commitment to provide legal insight to our clients and colleagues, our Employee Benefits and Executive Compensation Group has a monthly newsletter we call “Employee Benefits Insights,” where we provide you with updates on the most recent and pressing matters concerning employee benefits and other related topics. Click here or click the button to the left to subscribe.