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 discusses some of the policies that are important for the proper administration of 401(k) plans.
In June’s 401(k) Compliance Check, we looked at the importance of understanding your 401(k) plan’s definition of compensation and what to do if you had been applying your definition incorrectly. This month we will take a look at five policies or procedures that are important for proper 401(k) plan administration.
401(k) plans are required to maintain some of these policies either by ERISA or under Department of Labor (DOL) guidance, and others, while not necessarily required by law, are helpful in the event of a DOL audit or participant litigation. Having clear policies and procedures in place also helps employees involved in plan administration do their job more efficiently by mapping out appropriate steps to take when various situations arise.
Often, you can obtain these policies or procedures from various plan vendors, such as your 401(k) plan administrator or your plan’s investment consultant. But, with respect to some of these policies, such as the cybersecurity policy, you may need to reach out to qualified legal counsel for assistance.
Why you need it: The prohibited transaction rules under ERISA and the Internal Revenue Code prohibit loans from a 401(k) plan to plan participants unless the loans meet specific requirements. Typically, 401(k) plan documents do not include all these requirements, so a separate loan policy is needed. This loan policy then becomes a part of the “plan rules” from a legal perspective.
What’s typically included: Loan policies are typically fairly detailed and comprehensive, and typically cover the following items (among others):
Why you need it: Under ERISA, every 401(k) plan is required to establish written procedures for (1) determining whether a domestic relations order meets the definition of a qualified domestic relations order (“QDRO”) under ERISA, and (2) administering distributions under QDROs. These procedures must be used by the plan administrator to administer QDROs and a copy must be provided to participants and alternate payees after the plan’s receipt of the domestic relations order; however, it is the DOL’s view that providing a copy of the procedures to the participant and alternate payees before submitting a domestic relations order better facilitates the goal of timely, efficient, and cost-effective QDRO administration.
What’s typically included: The DOL recommends including at least the following items in a plan’s QDRO procedures:
Why you need it: Cybersecurity has become a recent focus of DOL plan audits ever since the DOL released its cybersecurity guidance in April 2021. During an audit, the DOL now asks plan sponsors to provide “all documents relating to any cybersecurity or information security programs that apply to the data of the Plan.”
What’s typically included: The following is a non-exhaustive list of items that, based on audit inquiries, the DOL expects a plan’s cybersecurity policy to cover:
Why you need it: Like cybersecurity, the DOL has placed a lot of focus on missing participants and uncashed checks in recent audits (see 401(k) Compliance Check #5), so you can expect that the DOL will ask for these procedures if your plan is audited. The DOL considers it a “red flag” that the plan may have a missing participant problem if a plan sponsor does not have sound policies and procedures for locating missing participants and handling uncashed checks.
What’s typically included:
Why you need it: In the past several years, there has been an explosion of ERISA class actions claiming breaches of fiduciary duties related to fees associated with, and underperformance of, investment alternatives in 401(k) plans. This highlights the need for a 401(k) plan’s investment committee to have clear procedures for selecting plan investment alternatives and monitoring those choices (including fees) to help avoid, or defend against, claims that the plan’s investment alternatives were improper.
What’s typically included:
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