2. Not following the plan’s definition of compensation for purposes of determining contributions or benefits and nondiscrimination testing.
“This seems simple and basic, but often an in-house administrator starts to use the wrong pay, and everyone holding that job in the future keeps doing it the same wrong way,” notes Jeff Cairns, Leonard, Street and Deinard PA.
In fact, the summer edition of the Internal Revenue Service’s Employee Plans News newsletter took up the subject, noting that a plan document may have multiple definitions of compensation, including definitions for purposes of calculating salary deferrals, matching contributions, and discretionary contributions. The use of an incorrect definition of compensation can lead to operational errors in nondiscrimination requirements, the employer’s deduction for plan contributions, and the determination of highly compensated or key employees, plan limits, and top-heavy minimum benefits.
“I recommend that plan administrators go through a payroll code list and match that list to the definition of compensation in the plan with respect to each type of contribution,” counsels David Joffe of Bradley Arant Boult Cummings LLP in Nashville, Tennessee. “As a related matter, plan administrators need to understand the differences in the types of compensation used for different purposes, such as nondiscrimination testing.”
Bernard G. Peter, Kubasiak, Fylstra, Thorpe & Rotunno, P.C., cites “excluding or intending to exclude part-time, seasonal, and temporary employees, but not incorporating language in the plan document, which provides that part-time, seasonal, and temporary employees will be eligible to participate in the plan if they complete 1,000 hours of service in an eligibility computation period.”
3. Not making sure that fees are reasonable.
One of the most widely cited fiduciary failures is failing to determine whether the fees being paid by the plan for administration and for investments are reasonable. “They do not compare their fees with those that are being paid by similar plans for similar services,” explains Tom Lund of Minneapolis-based Oppenheimer Wolff & Donnelly LLP. “The second most frequent fiduciary mistake is failing to document the decisionmaking process. This is like giving a disgruntled participant’s attorney the PIN to your bank account,” he notes.
“In our experience, there are a number of plans that have not conducted competitive bids for recordkeeping services in many years. Plan fiduciaries will want to make sure that consideration of a competitive bid is at the top of their list—and that the consideration of the bid process is captured in the official fiduciary review process for 2012,” observes Judith Boyette, Head of the Employee Benefits Practice Group at Hanson Bridgett LLP, San Francisco. Frank Palmieri, of Palmieri & Eisenberg, notes that another common issue is the “failure to document and understand expenses that may be charged to the popular ERISA accounts used to ensure vendors do not receive in excess of reasonable compensation.”
A related shortcoming is failing to document your efforts in ascertaining the reasonableness of fees and services provided to the plan.