25 June 2019

Five Red Flags for 401(k) Plans

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Most of the nation's more than 600,000 401(k) plans are fine. But that doesn't mean you should let your guard down when you get the statement for your employer-sponsored retirement plan in the mail. In fact, experts say you should always be checking to see if all is right with your plan.

Recent research from Judy Diamond Associates, a Washington, D.C.-based firm that publishes pension and welfare-plan data for the financial services and insurance markets, reveals that roughly one in 10 plans, or 63,349 plans, issued in 2012 what are called "corrective distributions."

A plan might issue a corrective distribution for what are called excess deferrals, or excess contributions, or excess aggregate contributions, or excess annual additions distributed. If corrective distributions are being issued frequently, that would be cause for concern. 

"Plans that issue corrective distributions may be experiencing flaws in the way their plans were designed or rolled out," according to Eric Ryles, a managing director with Judy Diamond Associates.

What can you do to protect yourself against corrective distribution? Ask your plan administrator or pension professional whether your plan is currently up to date with current law changes, and whether it has set up operating procedures and appropriate internal controls for the plan.

Ask also whether your plan administrator is aware of your plan's terms and that your plan is timely amended for law and regulatory requirements. According to the Internal Revenue Service, failure to timely amend can cause the plan to become non-qualified.

What are some other red flags?

Frequent changes — Frequent and unexplained service provider turnover/conversion, along with frequent changes or no changes to the plan's investment options, which would be equally worrisome.

Plan sponsors generally evaluate their plan providers once every three years to make sure they are getting the right plan and the right mix of investment options at the right price for their workers. If not, they might renegotiate their contract with their existing provider or switch vendors.

But employers that change providers more frequently than once every three years should give plan participants reason to worry. Why so? Advisors often receive a commission when plan sponsors change providers. And more often than not, plan participants pay, either directly or indirectly, that commission."

Watch those fees — 401(k) plans are now required by the Labor Department to disclose the fees plan participants pay for their retirement plan and investments. Consider it a red flag if your plan isn't complying with the new regulations or if you're paying excessively high fees. According to Ryles, nearly 46,000 401(k) plans had high administrative fees.

Self-dealing — If your plan isn't providing much in the way of investment education — such as meetings and online or printed material — consider that a red flag. Self-dealing might be one reason why plans aren't providing much in the way of education or services.

Are your contributions being misused? — Plan participants should also review the answers to "compliance questions" on their plan sponsor's Form 5500. The answers to these questions would reveal obvious red flags:

1) Did the plan have a loss, whether or not reimbursed by the plan's fidelity bond, that was caused by fraud or dishonesty? Only about 200 401(k) plans answered "yes" to this question in 2012, according to Ryles.

2) Did the plan hold any assets whose current value was neither readily determinable on an established market nor set by an independent third-party appraiser?

3) Has the plan failed to provide any benefit when due under the plan? Some 1,130 plans answered "yes" to this question in 2012.

4) Was there a third-party provider to the plan, a consultant or broker for instance, who did not correctly disclose the money they made from the plan?

What to read — Plan participants can stay abreast of their 401(k) plan by their employer's Form 5500 filing, the government-required pension filing that details, among other things, compliance violations. You can find your employer's Form 5500 at websites, such as FreeERISA.com. Of note, 5,114 plan sponsors did not file Form 5500 in 2012, according to the Judy Diamond research.

"If you care about your 401(k), [you] can take five minutes and [you] can review their employer's Form 5500," says Ryles. "[You] don't have to be [an expert] in how to read it. I would never expect that of a plan participant. But there are a couple real obvious things like the compliance questions. For the company to conceal that is a big deal."

Also read the Summary Plan Description or SPD, a document containing a comprehensive description of a retirement plan. You can get a copy of the SPD from your employer's human resource department.

Click here for the original article in USA Today.

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