Things You Might be Doing Right (or Wrong) with Your Multiple

Employer 401(k) Plan:

Best Practice Tips from the Trenches

Fiduciary Partners Retirement Group

Roger J. Rovell, J.D., LL.M., President
(800)371-0232
1. Are you annually updating client organizational information?

 Failure to track changes in ownership, corporate structure, etc. can lead to serious
operational errors in nondiscrimination testing, coverage testing, determining highly
compensated or key employees, etc.

 Recommended best practices:

Address client’s responsibility to update PEO in CSA, plan document, etc.

Recordkeeper and/or PEO follows up annually with worksite employer.

2
2. Have you identified those who serve in a fiduciary capacity since the plan
fiduciaries have personal liability under ERISA?

 Recommended best practice: Board or other governing body

appoints a fiduciary committee charged with authority and
responsibility to oversee plan investments and plan operation.
Appointing a committee also helps insulate board, officers and
other employees not involved in plan-related activities.

 Board that appoints a fiduciary committee has a fiduciary

responsibility to monitor the fiduciaries it appoints. To facilitate
board’s duty to monitor, appointed fiduciaries should periodically
report (no less frequently than annually) their activities to the
board.

 Plan documentation, corporate minutes and by-laws, etc., should

align with the chain of fiduciary authority.

3
3. Do the fiduciaries understand their responsibilities and the standards of conduct
under ERISA?

 In recent audits, Department of Labor ("DOL") has asked for evidence of fiduciary training.

 Among other things, retirement plan fiduciaries must act in the best interests of plan participants and
are held to the standard of a prudent expert.

 Courts and DOL focus on fiduciary process and procedures, not outcomes.

 Don’t forget to document the process and procedures (e.g., minutes, investment reports, etc.)

4
4. Are you meeting regularly to monitor investments and address plan-related
issues, new developments, changes in the law and regulations, etc.?

 Process and due diligence are a plan sponsor’s and fiduciary’s best defense against
claims of fiduciary imprudence.

 Recommended best practice: Quarterly meetings; semi-annual at a minimum.

5
5. Are you conducting an annual share class analysis in accordance with the
Tibble case (important excessive fee lawsuit)?
 In the Tibble case, fiduciaries were held liable for using retail versions of mutual funds instead of
the institutional versions, where there was no evidence that fiduciaries considered lower-cost
institutional versions.

 If lower-cost share classes are available and/or are not otherwise being used, document the
rationale in the minutes (e.g., additional revenue needed to pay for plan administration).

6. Are you conducting an annual comprehensive "deep dive" review of your

plan’s qualified default investment alternative (QDIA) and confirming
compliance with the DOL’s QDIA regulations?

 If your QDIA is a target date fund, are you familiar with the DOL’s "tips" for
fiduciaries regarding the selection and monitoring of target date funds?

6
7. Are you preparing minutes of all fiduciary committee meetings and retaining
documentation?

 Demonstrates fiduciary due diligence and "prudent process”; case law demonstrates that failing to
document fiduciary process leaves fiduciaries vulnerable to attack.

 Keep fund performance reports, minutes, meeting materials, etc. for at least seven years.

 Keep plan documents for as long as the plan is in existence and until all benefits are paid.

7
8. Are you utilizing an investment policy statement and annually reviewing same?

 Demonstrates prudent fiduciary process.

 Annual review of the investment policy statement should be documented in the

minutes.

 Make certain there is nothing in the investment policy statement that conflicts with
actual practice.

8
9. Fiduciaries have personal liability under ERISA; are they appropriately protected
and indemnified?

 Recommended best practices:

 ERISA fiduciary liability insurance (do not confuse with required

ERISA fidelity bond).

 Indemnification agreements for those serving as fiduciaries.

9
10. Are you properly managing forfeiture accounts?

 Forfeited amounts are often placed into forfeiture suspense account(s) and accumulated over several
years. The Internal Revenue Code does not allow this practice and it could result in disqualification of
the plan.

 IRS Revenue Ruling 80-155 states that a plan is precluded from carrying over plan forfeitures to
subsequent plan years, as doing so would violate the rule that all monies in a defined contribution
plan must be allocated annually to plan participants.

 Also see IRS newsletter, Retirement News for Employers (Spring 2010).

 Recommended best practice: Regularly monitor forfeiture accounts.

10
11. Do you automatically cash out terminated vested participants with an account
balance of less than $5,000?
 Once participants are cashed out, plan fiduciaries no longer have responsibility for their account
balance.

 Mitigates the problem of missing participants and uncashed checks.

 Cashing out small balances increases the MEP’s average account balance, a factor that may be
relevant in negotiating recordkeeping fees.

 ADDS ECONOMIC VALUE ($$) FOR MEP ADOPTERS: Permits the faster release of forfeitures which
can be used to offset future employer contributions.

 News worth communicating?

 Some MEPs may need to be amended to permit automatic cash out of balances under $5,000.

11
12. Do you periodically analyze the participant database to identify terminated
vested participants with a five-year break in service so that non-vested amounts
can be forfeited?

 ADDS ECONOMIC VALUE ($$) FOR MEP ADOPTERS:

Forfeited amounts can be used to offset future

employer contributions.

News worth communicating?

12
13. Do you notify the recordkeeper when clients terminate the PEO relationship?

 Under many plan documents, termination of plan adopter/PEO relationship results

in full vesting of affected participants’ accounts.

 Failure to fully vest participants can result in fiduciary breach and plan
disqualification.

13
14. Are you properly managing and tracking an expense reimbursement account?

This account can consist of excess revenue sharing amounts and/or an asset charge
assessed against participants’ accounts to reimburse the PEO for administrative
expenses.
Amounts in expense reimbursement account should be used each year to pay for
proper plan expenses and not carried over. Amounts remaining at end of the year
should be allocated to participants’ accounts as additional earnings.

14
15. Are you familiar with Department of Labor (“DOL”) Advisory Opinion 2013-03A,
which details the responsibility of employers with respect to expense
reimbursement accounts and revenue sharing in general.
 DOL states that fiduciaries must be capable of periodically monitoring that revenue sharing amounts
to which plan is entitled are correctly calculated and applied for benefit of the plan.

 If revenue sharing is credited back to participants, fiduciaries should be capable of monitoring that
correct amounts are credited to participants’ accounts.

 Recommended best practice: Periodically incorporate into fiduciary committee meetings reports
tracking revenue sharing and amounts credited to an expense reimbursement account.

 If the provider uses revenue sharing to offset its administrative fees, fiduciaries must ensure that the
compensation paid (directly or indirectly through revenue sharing) is reasonable.

15
16. Are you making sure that expenses paid from plan assets (including an expense
reimbursement account) are eligible to be paid from plan assets?

 Hot-button issue for DOL.

 Plan assets (including amounts allocated to an expense reimbursement accounts) can be used to pay plan
administrative expenses. These include costs associated with amending the plan to keep it in compliance
with tax laws, nondiscrimination testing, recordkeeping services, investment advisory services, audit fees
and providing plan information to participants (notices, SPDs, education communications, etc.).

 Under limited circumstances, plan sponsors can be reimbursed from plan assets for cost of employee(s)
who service the plan (e.g., salary, benefits).

 “Settlor” expenses cannot be paid from plan assets. Settlor expenses are viewed as benefiting the
employer and include the cost of services to establish, terminate or design the plan.

16
17. Do you have processes and procedures in place to locate “missing” participants
and deal with uncashed checks?

 Recent DOL and IRS focus on issue.

 Failure to address can result in asserted breach of fiduciary duty (DOL) and plan disqualification
(IRS).

 Recommended best practice: Review missing participant/uncashed checks procedures with

recordkeeper.

 Having appropriate processes and procedures in place may limit potential liability in an audit.

17
18. Have you reviewed the 408(b)(2) service provider fee disclosure notice
provided by the covered service provider(s)?

 Recommended best practice: Document in the minutes that service provider fee disclosure(s) were reviewed and that the
disclosures contained all required information.

19. As a follow-up to the service provider fee disclosure, did you benchmark your
fees to ensure they are consistent with competitive benchmarks?
 Recommended best practice: Regular fee benchmarking. Compare fees charged by other service
providers servicing PEO multiple employer plans of similar size. Also, benchmark fees against what
would be paid by a worksite employer that adopts its own single employer plan.

 Recommended best practice: Competitive search (i.e., RFP or RFI) every five years for major service
providers; longer period may be acceptable if the fees are regularly benchmarked by an independent
source.

18
20. Are you utilizing independent consultants to advise on reasonableness of the
plan fees, compliance issues, investment selection and monitoring, regulatory
updates, fiduciary governance and best practices, recordkeeper adherence to
fiduciary and compliance best practices, industry trends and other plan-
related issues?

 Use of independent consultants is viewed by courts and DOL as an indicator of prudent fiduciary process.

 If plan fiduciaries lack the skill, prudence and diligence of an expert in retirement plan matters, ERISA expects
them to get help.

 With regard to fees and services, recordkeeper/TPAs have a commercial, not a “fiduciary,” relationship with the
plan. Relying solely on information provided by recordkeeper/TPA as to the reasonableness of fees, adherence
to fiduciary and compliance best practices, etc. may not be prudent.

 Relying solely on recordkeeper/TPA with regard to investment selection and monitoring limits consideration of
alternative points of view; can be a conflict of interest if the provider derives revenue from the investments.

19
21. Are you monitoring recordkeeper practices in terms of maintaining plan
compliance?
 Recordkeeper/TPA practices are key to maintaining regulatory and fiduciary compliance.

 The plan sponsor, not the recordkeeper/TPA, has ultimate responsibility for tax, legal and operational
compliance.

 Independent review of recordkeeper/TPA practices results in better processes, reduced risk and an
improved plan operation.

 Example: Does recordkeeper ensure that all required notices are delivered to participants (NOT to the
worksite employer or PEO)?

 Failing to provide timely notices may invalidate fiduciary protection; in worst case, could result in plan
disqualification.

 Example: Does recordkeeper/TPA take work off your desk (e.g., tracking eligibility, hardship determinations,
loan processing, delivering eligibility notices, SPDs, other required notices, etc.)?

20
22. Are you annually reviewing recordkeeper processes and controls and
documenting same in the minutes?

Inadequate processes and controls can lead to errors and opportunities for the
misappropriation of plan assets.

 Due diligence inquiries to include: Recent litigation against recordkeeper;

business practices in handling plan assets; liability insurance coverage; third-
party oversight and certifications; internal processes and controls, etc.

 Demonstrates prudent fiduciary process.

21
23. Are you reviewing and paying attention to 401(k) cybersecurity?

 Biggest emerging issue in the retirement industry.

 Plan sponsors should ask and document what the recordkeeper has in place to
protect participant information.

 Also review (and document) internal cybersecurity procedures and safeguards.

22
24. Do you operate your plan in accordance with the terms of the plan
document?

 One of the most common errors found in IRS audits.

 Errors around a plan’s definition of compensation are frequent.

 Recommended best practice: A document/process review or “audit.”

23
25. Are you depositing contributions on a timely basis?
 Hot-button DOL issue.

 Recommended best practice: As soon as you can, but no less frequently than
weekly (i.e., five business days).

26. Conversion issues (merger of client plan into PEO MEP or transfer of assets to
or from another PEO MEP):
 If conversion occurs during the year, recommend that testing for entire plan year be conducted by
plan with assets at year end.

 Avoid lapse or gap in contributions for mid-year conversion of a safe harbor plan.

24
27. If the service provider acts in the capacity of an "investment manager" (as
that term is defined in ERISA), have you demonstrated a prudent process in
the selection and monitoring of the investment manager?

Recommended best practice: Annually conduct investment manager due

diligence and document the process.

Due diligence inquiries to include: satisfaction of ERISA section 3(38)

requirements; qualifications to serve as investment manager; how manager is
compensated and reasonableness; existence of conflicts; history of discipline;
manager’s investment process and consistency with modern portfolio theory;
and liability insurance.

Monitor/review the “managed” accounts and document the process.

25
28. Do you reach out to “top adopters” at regular intervals (e.g., bi-annually; after
testing is completed, etc.)?
 Provides value-add for the PEO and the adopting client.

29. Are you conducting mid-year ADP/ACP and top-heavy testing?

Recommended best practices:

 Contact clients who are failing ADP/ACP tests or trending towards top-heavy.

 Recordkeeper to provide communication to client.

 Provides value – add for the PEO and the adopting client.

26
30. Are you familiar with and monitoring developments relating to DOL Advisory
Opinion 2012-04A on "open MEPs"?
 Certain types of MEPs were determined to be a collection of separate single employer plans rather than a
single plan for ERISA purposes.

 If MEP is considered a collection of single employer plans for ERISA purposes, will require multiple
5500s (for each participating employer) and multiple audits (for adopters with 100 or more
participants).

 DOL cited absence of relationship among the participating employers unrelated to benefits.

 DOL opinion does not affect tax qualification and application of IRC §413(c).

 The Advisory Opinion was NOT issued with respect to a PEO MEP.

 There have been frequent legislative proposals addressing open MEPs; may have implications for PEOs.

27
31. Are you aware of IRS focus on internal controls?

 If audited by IRS, evidence of adequate internal controls may limit the scope of IRS review.

 Recordkeeper and investment custodian play a key role in controls.

 Sample internal control questions are available on IRS website: www.irs.gov/Retirement-Plans/EP-Team-

Audit-(EPTA)-Program---Internal-Control-Questionnaire

28
32. Have you considered the fiduciary responsibility of employers that adopt the
PEO MEP?

 Decision by an employer to adopt a plan, including a MEP, is generally a non-fiduciary “settlor”

function.

 BUT – participating employer’s decision to engage the services of an entity (i.e., the PEO) that
sponsors the MEP may be considered an exercise of discretion and a fiduciary act.

 Participating employer must act prudently and in the best interest of its employees in selecting
the service provider (i.e., the PEO and the MEP)and must monitor:

(i) the performance of the MEP sponsor in carrying out its plan-related
responsibilities; and

(ii) the reasonableness of fees.

29
32. (continued) Have you considered the fiduciary responsibility of employers
that adopt the PEO MEP?

In a recent DOL audit of a PEO MEP, DOL requested copy of “written procedures
outlining the duties and responsibilities of the Plan Sponsor and all
participating employers.”

Recommended best practice: Provide annual communication to participating

employers detailing the PEO’s and service providers’ efforts to operate and
administer the PEO MEP in a prudent manner.

 Communication intended to facilitate satisfaction of MEP adopter’s fiduciary

responsibility to prudently select and monitor the MEP provider.

 Communication reinforces the value-add of the MEP.

30
33. Are you paying attention to the 401(k) plan excessive fee lawsuits?

 An excessive fee lawsuit has been filed with respect to a PEO MEP.

 Lawsuits demonstrate that a prudent process and documentation of that

process are key to defending claims of fiduciary breach/imprudence.

31