Although 401(k) plans are sure to raise the spirits of a company’s employees, retirement plans do come with a lot of red tape and hassle on the employer’s end. The IRS requires that workplace retirement plans remain in compliance with a large array of regulations, so it’s important for administrators and sponsors to regularly oversee the plans with which they are entrusted, and perform a variety of duties.
Below, we’ll outline the difference between plan administrators and sponsors, and the responsibilities of each.
Administrator vs Sponsor: what’s the difference?
The sponsor of a 401(k) plan is the entity that establishes the retirement plan for a company and its workers. Normally, this is the employer itself, a union, or a selected employee of the firm.
The Employee Retirement Income Security Act of 1974 (known less formally as ERISA) requires the plan sponsor to select an administrator. A plan’s administrator is the organization that actually oversees the operation of the plan. Once again, this could be the employer itself, a team of employees, a third party, or a company executive.
Some responsibilities of the administrator can be outsourced to a service provider. For example, a financial advisor may be hired to provide investment advice and consulting to employees. And an auditor may be brought on board to ensure that a plan’s financial statements are in line with federal laws.
Tasks that are normally retained by the administrator include serving as the plan’s record keeper, ensuring the 401(k) operates in accordance with plan documents, and securing a fidelity bond if necessary. Here’s a list of other important functions of the administrator:
Perform annual compliance testing. This is a very important part of a 401(k)’s oversight. The IRS requires every qualified plan to undergo yearly nondiscrimination tests to ensure that highly-compensated employees don’t excessively benefit from tax deferral compared to other employees. The tests include the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) tests. If the retirement plan fails any of the nondiscrimination tests, the administrator must take steps to bring the plan into compliance with IRS regulations. These actions can include refunding highly-compensated employees’ contributions (and the accompanying tax benefits) to reduce average contribution levels of these employees; or making nonelective company contributions to lower-earning employees to raise their contribution rates. The administrator could do a mixture of these two as well.
Submit Form 1099-R. Whenever a distribution is made from a 401(k), Form 1099-R needs to be filled out and issued to the account holder. Some of the payments that must be reported on this form include disability payments and death benefits. Payments that are subject to withholding of Medicare and Social Security taxes should not be reported. Instead, these payments go on Form W-2, which, as we’ll see below, is the responsibility of the plan sponsor.
Submit Form 5500. ERISA requires this form to be submitted to the IRS annually. It must be filed electronically through the government’s IFILE system. Plans that have fewer than 100 participants can use Form 5500-SF, the short version. And one-participant plans can use Form 5500-EZ.
The form asks for information on vested benefits, deceased participants, compliance data, and funding details. The purpose of the form is to give Uncle Sam a clear picture of a plan’s operations and financial condition.
Oversee loans. If a plan permits borrowing, the administrator bears the responsibility for ensuring loans meet IRS guidelines and the requirements spelled out in the plan’s agreement. These include ensuring that an account’s balance was adequate to qualify for a loan, and that loan payments were repaid on time. The administrator must also take action on defaulted loans. If a withdrawal qualifies as a hardship, the administrator needs to retain documents to verify the need.
Communicate with participants. Because many employees will be unfamiliar with a company’s 401(k) details, it is up to the administrator to educate them on the features of the plan. This communication should include an explanation of how vesting periods function, and what benefits the plan offers. Any future changes in the plan also need to be conveyed to participants by the administrator.
Although the sponsor’s major task is to establish the 401(k), it still has some important assignments to take care of on a regular basis. These include:
Collaborating with the plan service provider. This duty is so important because there needs to be a regular link between the company and the service provider. At least one per year, the service provider and sponsor should review the company’s retirement plan. The sponsor should amend plan provisions when needed and make sure payroll compensation is correct. The sponsor should also ascertain if terminations and new hires affect the plan in any way.
Being a Fiduciary. A 401(k)’s sponsor is required by federal law to be a fiduciary. A fiduciary is a party that defends the interests of others. In the context of a 401(k) plan, a fiduciary must protect the interests of employees who have contributed money to the plan. Some fiduciary tasks include selecting and monitoring the service provider, understanding the terms of the retirement plan, and avoiding prohibited transactions. The sponsor in its fiduciary role also needs to make disclosures to employees and their beneficiaries in a timely fashion. The sponsor further needs to ensure that reports are submitted to the government on time.
Knowing the details of the plan. The sponsor must know the features of the plan, what is covered, and what is not. Furthermore, the sponsor needs to identify which employees are eligible to participate in the plan, and which are not. Other details the sponsor needs to keep abreast of include vesting policies, the amounts and types of allowable contributions, how company contributions are made, and how benefits are distributed to employees. Obviously, in some cases there will be overlap between the duties of the sponsor and administrator.
Reviewing the service provider’s reports. The sponsor needs to look for possible errors in contribution amounts. These can be found in the allocation report. The distribution report must also be examined to make sure employees have started their required minimum distributions (RMDs) on time and have filled out the appropriate paperwork.
Obtaining an independent review of the 401(k). It’s a good idea to bring in a fresh pair of eyes that are experienced in retirement plan compliance. The third party may notice discrepancies that have been overlooked by the sponsor or administrator. In the long run, this could save the company money and improve the operation of the plan.
Maintaining oversight of a pre-approved plan. If a company buys a pre-approved plan, the sponsor needs to be sure to go through the adoption agreement and verify the fees that will be charged by the provider. The sponsor should also store the IRS-issued advisory letter in a safe place. Other duties of the sponsor include signing plan amendments that are sent by the service provider and sending the amendments to the administrator.
Thoroughly reviewing the adoption agreement. A pre-approved plan may come with an adoption agreement. If this is the case, the sponsor needs to study this document in detail because it is a part of the plan. The adoption agreement will specify how and when benefits are to be paid, when employees become vested, and how a company’s contributions are split among participants, among other important features.
Working together, a 401(k)’s administrator and sponsor can ensure a company’s defined contribution plan stays in compliance with all federal requirements. They can also make certain that employees are participating in the plan and understand all of the opportunities and responsibilities their company offers them.