Best Practices for Retirement Plan Sponsors

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3 Plan Document and Operations Plan s operations must be based on the written plan document(s) All plan communications and associated materials should be consistent Documents should be current and properly executed Is a favorable determination letter needed? 2014 All Rights Reserved Aronson LLC Slide: 3

4 Plan Document and Operations Problematic areas Application of eligibility rules Part-time, seasonal, on-call Allocation requirements to share in employer contribution Last day rule or hours requirement being waived for retirement, disability or death Definition of compensation Capturing the correct compensation for each contribution type Unique compensation components are most challenging Using the correct computation period for matching contributions Per pay-period vs. annual 2014 All Rights Reserved Aronson LLC Slide: 4

5 Plan Document and Operations Problematic areas Distributions Eligibility Vesting Data Elements Calculation Process Vesting Calculation of years of service Hours method vs. elapsed time Merger and acquisition issues Multiple schedules Credit for prior service Schedule modifications 2014 All Rights Reserved Aronson LLC Slide: 5

6 Plan Document and Operations Problematic areas Hardship distributions Eligibility Documentation Review In-coming rollovers Must be qualified and must know if there is any basis Plan sponsors responsibility to take reasonable efforts to determine qualified status of incoming amount Can rely on employee s representation regarding potential after-tax amounts Revenue Ruling All Rights Reserved Aronson LLC Slide: 6

7 Plan Document and Operations Problematic areas Loan program Allowable terms Primary residence Interest rate determination Allowable number of outstanding loans Proper and timely set-up in payroll Difficulties associated with custodian change Sponsor should manage program with the same diligence as a lending institution All Rights Reserved Aronson LLC Slide: 7

8 Internal Controls Implementing strong internal controls for the plan is important to ensure you can meet your fiduciary responsibilities related to plan administration: Maintaining accurate books and records Filing a complete and accurate Form 5500 Safeguarding assets Complying with laws and regulations 2014 All Rights Reserved Aronson LLC Slide: 8

9 Internal Controls Biggest issues we see: #1 - One person responsible for all plan functions Reviews and approves payroll, withholdings and match Sets up participant accounts at recordkeeper Uploads data file to recordkeeper Approves remittance of funds to custodian Approves vesting and benefit payments Approves expenses 2014 All Rights Reserved Aronson LLC Slide: 9

10 Internal Controls Control -Segregation of duties Basic tenet- separate functions for: approval reconciliation asset custody If cannot achieve the basic separation, a detailed review at a higher level should be implemented 2014 All Rights Reserved Aronson LLC Slide: 10

11 Internal Controls Segregation of duties-examples Keep the HR functions for maintaining participant data separate from the Accounting functions for calculating and remitting payroll withholdings and employer contributions Individual who sets up account for participant should not be in position to direct cash to that account and vice versa (HR sets up account for false employee, then is responsible for uploading contribution by participant and can divert amounts to that false account or calculate a match for that false employee or put extra funds in their own account or an account of a colleague) 2014 All Rights Reserved Aronson LLC Slide: 11

12 Internal Controls Segregation of duties-examples Keep the function for maintaining participant data separate from the approval function for benefit payments Individual who enters the hire date for participant should not be in position to approve vesting and payment (entering a false hire date can increase vesting and thereby increase payment) Assign an individual to oversee conflicting functions that is not involved in the day to day responsibility 2014 All Rights Reserved Aronson LLC Slide: 12

13 Internal Controls Biggest issues we see: #2 Person given responsibility for plan functions does not understand the importance of the role Procedures not performed timely Procedures not performed accurately Records not obtained, or retained Importance of the plan not stressed by upper management (i.e. not taken seriously) 2014 All Rights Reserved Aronson LLC Slide: 13

14 Internal Controls Control - Assign responsibilities to qualified personnel Provide proper training Provide proper review and oversight When there is turnover, pay particular attention during and after transition to new employees-they might do things the way they always have instead of how your plan is written Don t let plan responsibilities fall to a low priority level 2014 All Rights Reserved Aronson LLC Slide: 14

15 Internal Controls Biggest issues we see: #3 [Insert provider name here] handles all of that No clear understanding of what provider does and does not take responsibility for 2014 All Rights Reserved Aronson LLC Slide: 15

16 Internal Controls Control Understand and monitor third party providers Is there a SOC-1 report and is the opinion unmodified? Read the user controls in their report to ensure you understand what they expect you to be doing Monitor the provider regularly Garbage in/garbage out be sure what you give them is accurate, including census at end of year used for compliance testing Assign access rights to the minimum number of people necessary read only to those that do not need to input or change data; enough to provide ability to remit information timely if main employee is on leave; terminate rights in a timely manner 2014 All Rights Reserved Aronson LLC Slide: 16

18 Internal Controls Control - Step up oversight when there is an acquisition/plan merger/plan termination Get records from prior plan administrator/personnel before they terminate employment Keep prior plan vesting schedule history and ensure provider is applying properly Control When payroll system changes be sure deduction settings are proper 2014 All Rights Reserved Aronson LLC Slide: 18

19 Internal Controls Other recommendations: Understand your investments and how they are valued Retirement plan committee should be involved in more than just investment performance review Periodic fiduciary training for owners/key personnel/committees Take action on any issues identified by the external auditor 2014 All Rights Reserved Aronson LLC Slide: 19

20 Performing a self audit What is a self audit? An inspection/testing of the plan provisions to ensure your plan is in compliance with the plan document Why is this important? While third party administrators may not require reviews of transactions and approve such transactions, the burden falls to plan sponsors when errors are found Key areas to consider: Contributions Distributions Loans 2014 All Rights Reserved Aronson LLC Slide: 20

21 Contributions audit Ideally, contributions should be reconciled on a pay by pay basis Monthly or quarterly reconciliations are acceptable Employee withholding totals per the company totals page of the payroll register should be agreed to the remittance contribution confirmation Spot-checking a handful of employees per pay is good practice 2014 All Rights Reserved Aronson LLC Slide: 21

22 Contributions audit continued The remittance frequency of employer contributions will drive the audit timing Pay by pay, monthly, quarterly or annually are all options Employer contribution totals should be agreed to the remittance contribution confirmation Spot checking a few employees is a good practice 2014 All Rights Reserved Aronson LLC Slide: 22

23 Contributions audit continued Rollover contributions Once approved, should review activity to ensure amount approved is added to participant s account Investment allocation should be reviewed and agreed to form 2014 All Rights Reserved Aronson LLC Slide: 23

24 Loans audit After a loan is processed and approved, the amount taken from the participant s account should be reviewed Did the amount requested/paid fall within the parameters of your plan document? Loan terms per form should be reviewed and agreed to plan sponsor site Is the term in accordance with the plan document/loan policy? Is the interest rate in agreement with the plan document/loan policy? Verify that repayments are deducted from participant s pay subsequent to issuance 2014 All Rights Reserved Aronson LLC Slide: 24

25 Distributions audit Processed distributions should be reviewed once approved If no approval is required, distributions should be reviewed on a monthly or quarterly basis 2014 All Rights Reserved Aronson LLC Slide: 25

26 Distributions audit The review process Were the proper fees deducted? Was vesting properly calculated? Were taxes deducted? Was the amount proper? Hardships were contributions suspended? RMDs are participants over the age of 70.5? Are there participants over the age of 70.5 that do not have distributions? In-service is the participant over 59.5? 2014 All Rights Reserved Aronson LLC Slide: 26

27 Audit final thoughts Know your plan document! Review quarterly (at a minimum) Auditing your plan may take a few hours a month, but will save you time in the long run Errors found are your responsibility even if you did not formally approve/review 2014 All Rights Reserved Aronson LLC Slide: 27

29 Fiduciary Named Fiduciary Delegated Manager Functional Fiduciary Co-Fiduciary Directed Trustee A plan may have more than one fiduciary and/or an individual serving in more than one fiduciary capacity 2014 All Rights Reserved Aronson LLC Slide: 29

30 Functional Fiduciary 3(21) Exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, or Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or Has any discretionary authority or discretionary responsibility in the administration of such plan All Rights Reserved Aronson LLC Slide: 30

31 A Fiduciary is NOT Anyone who performs ministerial functions and does not have the authority to make decisions with respect to plan policies, procedures, etc. Example: Individual who calculates benefits or processes claims 2014 All Rights Reserved Aronson LLC Slide: 31

32 Fiduciary Responsibilities A fiduciary must act solely in the interest of the plan participants, their beneficiaries and alternate payees Carry out their duties prudently Follow the terms of the plan document (unless the documents are inconsistent with ERISA) Diversify plan assets Pay only fair and reasonable expenses 2014 All Rights Reserved Aronson LLC Slide: 32

36 RFP Cost Investments Service Let your advisor do the work! Costs Investment Management Recordkeeping Retirement Plan Technology Services Employee Communications Compliance 2014 All Rights Reserved Aronson LLC Slide: 36

37 Homework Determine fiduciary status Establish fiduciary responsibilities committee education Establish and follow a prudent process for understanding, monitoring and documenting fees Accept only full and transparent fee disclosures from all service providers 2014 All Rights Reserved Aronson LLC Slide: 37