The end of a financially challenging year is approaching, and with inflation and the uncertainty about the economy growing, now is an important time for plan sponsors and their advisors to do a top-to-bottom review of their employer sponsored 401(k) retirement plans.
Well-run plans have frequent reviews for many of their individual elements, so why is a full review vital? Taking a holistic approach enables employers and advisors to check the overall health of the plan, determine if it’s achieving its goals, and gauge how prepared it is to deal with changes—to government policies, environmental factors like the economy, and internal changes within the company.
Taking the time now to thoroughly vet every element of your, or your client’s, 401(k) plan can prevent costly stumbles—both with compliance and budgeting–and refocus your goals for 2023.
Review compliance procedures
Inflation is impacting everyone, including plan sponsors and advisors, who are seeing increases in the costs of running and managing retirement plans. Both should brace for higher general costs of day-to-day operations and also prepare to meet inflation-increased Employment Retirement Income Security Act (ERISA) penalties in 2023. The Employee Benefits Security Administration (EBSA) will likely release the Guidance for the increased penalties in January, but now is the time to take action to prevent and mitigate the potential impact.
This means reviewing compliance procedures, including automated collection of funds and information, notifications, and filing of compliance reports. In 2022, the increase in penalties for failing to file Form 5500 increased from $2,249 to $2,400 per day, starting on the date of the plan administrator’s failure or refusal to file. Penalties for failing to properly make a distribution increased by $1,024 to $18,500 from $17,416 per improper distribution. And the cost for failure to provide the required ERISA preemptive notice to plan participants who have automatic contributions increased from $161 per day to $171 per day (not to exceed $1,713 per request). And this is just the tip of the iceberg. These costs can quickly add up, so making sure that your automated systems are properly performing can help prevent an unwelcome and unexpected penalty.
Of course, mistakes happen. Properly budgeting for the possibility of having to pay inflation-increased penalties will mitigate the overall effect it can have on your business.
Evaluate plan features
The primary goal of any 401(k) plan is to help employees meet and exceed their retirement goals. Turns out the 401(k) can do more than that. The last few years have seen significant shifts in what employees want from their benefit plans, including the 401(k). A full review of your plan allows you to evaluate current plan features and what changes you may need to make based on your employee demographic. Look at plan participation numbers and check engagement. You could implement automatic-enrollment if many employees aren’t actively participating in the plan. Offering an employer match, Roth and additional after-tax contributions are other plan features that may incentivize participation. Beyond plan features, ensure it’s easy for employees to find information on how to take full advantage of the retirement plan. Employees may need access to licensed representatives to help them navigate investment selection or financial wellness resources that educate them on topics beyond the 401(k), like debt management, buying a home, and saving for a child’s college education.
Benefits plans are one of the biggest budget items for any plan sponsor, but they also provide long-term advantages that, when properly structured, offer significant rewards to the employer. Strong benefit programs help attract and retain employees, increase employee satisfaction, and help employees retire on time.
Perform analysis of service providers
Properly administering 401(k) plans is a team effort. That means that a thorough review includes evaluating your relationships and agreements with service providers, their operations, and what benchmarking can tell you about how they are performing.
Plan sponsors must ensure that the costs they pay for the services rendered are reasonable. It is imperative to confirm first, however, that the services received are appropriate. Even if the fees are reasonable, they may not be necessary. Evaluate the services and quality of those services from your partners by asking a series of questions. Have they changed? Are the services you are paying for aligned with your and your employee’s needs? Are your vendors meeting the benchmarks that have been clearly defined? Do you need to update or change the parameters of your benchmarking for the new year? Suppose you anticipate significant growth in participants or plan assets. What adjustments do you need to plan for now to ensure these essential relationships can grow with you—including what you are paying for, how vendors are being paid, and how this aligns with the value you are receiving? Do your agreements allow for the flexibility you may need in the immediate future? What can that tell you about vendor performance and their effectiveness in responding to changes in 2022? Have the performance benchmarks in your agreements been effective in redressing issues? Are vendors responsive in fixing known problems?
Start the year by performing quantitative and qualitative analysis of 401(k) service providers. If it’s time for a full vendor search, employers should conduct an RPF (request for proposal).
Consider implementing new technology
The world is moving fast and changes in technology, the economy, staffing, and regulations can all impact the functionality of a vendor relationship. This is also an excellent time to consider what new technology is available for the financial services market and how important early adoption is when considering your vendor relationships. While automated systems have undoubtedly improved cost efficiency and reliability of reporting, being on the cutting edge doesn’t always pay off. New technology often comes with additional costs, including the need to change vendors. Other factors to consider include how implementing the new technology could affect your operations, any necessary downtime, and the new device or software’s reliability.
Ultimately, new technology mandates a balancing act between innovation, stability, identifying your risk tolerance, and the benefits of early adoption.
Strengthen cybersecurity standards
Cybersecurity breaches continue to rise year-over-year, and several changes to the patchwork of state laws and regulations will be implemented in 2023, with more expected.
In April 2021, the Department of Labor (DOL) issued guidance that ERISA could require fiduciaries to take appropriate precautions to reduce cybersecurity risk to retirement plan assets and participants’ personal information. As a result, plan sponsors are advised to not only strengthen cybersecurity standards across their organization but also ensure cybersecurity becomes a large portion of the initial and ongoing evaluation of service providers and vendors, including:
- Determining whether their cybersecurity program is adequate. This includes an annual risk assessment and third-party audit. This also applies to assigned information security roles, business continuity, disaster recovery, and incident response.
- Assessing whether their secure system development life cycle program (SDLC) has been implemented for all systems and any new projects. This includes maintaining strong technical controls over any data they collect, hold, or convey.
A sleeper issue is the expiration of employee exemptions for the California Privacy Rights Act (CCPA) on January 1, 2023. This affects any business operating or with employees, vendors, or subcontractors based in California. Now is the time to plan for the next year, including setting a schedule for cybersecurity training and periodic reviews, to assess what personal data you’re collecting and holding for all employees, and what data you actually need to have, and what can be purged.
As the end of the year approaches, prioritizing a review of every aspect of your 401(k) plan is a chance to step back to review what’s changed, what’s working, and how to improve your plan for the new year. It’s also a time to set new goals and strategize on the best ways to adapt to the ever-changing landscape in the benefits industry.
Jennifer Tanck, Esq. is Executive Vice President of Pensionmark. Laura Battle is Executive Vice President of Pensionmark.