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Retirement Plan Sponsors Must Meet Compliance Responsibilities

Printed September 6, 2001 by Business Opportunities Journal
By – J. Graydon Coghlan – Coghlan Financial Group, Inc.

If you sponsor a qualified retirement plan, you have made a significant investment in your plan. You are responsible for protecting your investment by assuring that the plan complies with the requirements of the Employee Retirement Income Security Act of 1974 – also known as ERISA – and the Internal Revenue Code.

The cost of noncompliance can be high. Your plan’s tax-qualified status can be put at risk, you as the sponsor can be exposed to possible liability, and the plan’s value to your participants could be called into question.

Compliance Responsibilities:

Plan sponsors need to spend time maintaining their plan to meet compliance obligations. Here are five major areas to address:

Plan design and documentation. Plan sponsors often use prototype plans and trust documents that are pre-approved by the Internal Revenue Service. Otherwise, customized plan documents must be drafted by an attorney. Prototype plans offered by financial institutions are often used to meet the requirements that plans must be in writing and that they comply with the IRS’s code. These plans can easily be adopted by your business, providing enough flexibility to structure your retirement plan to meet the needs of your business. They are generally economical to adopt and administer.

Record keeping and administration. These tasks must be accomplished on a timely and accurate basis. Depending on the type of plan, record keeping and administration may include periodically sending account information to participants, filing annual reports with the IRS, depositing participants’ deferrals and distributing benefits to participants and beneficiaries. For participant-directed qualified plans such as 401(k) plans, this can be a particularly complex task.

Trustee services. These services may include custody and control of plan assets, trust accounting and cash management. To reduce fiduciary corporate risk, many plan sponsors retain a corporate trustee to perform some of these functions.

Employee communication and education. As employees begin to rely more on employer-sponsored retirement plans for their retirement income, employee communications and education take on growing importance. Poor employee communications can hinder even the most well designed plan. The success of a voluntary program is measured in part by the level of employee participation. To help employees understand the benefits of participating in the plan and the nature of its investment alternatives, many employers offer pre-enrollment and enrollment communications, education seminars, individual counseling, plan statements and newsletters. Good communication helps your employees make appropriate investment choices and increases the likelihood of their participation.

Investment management. Perhaps the key compliance responsibility of a retirement plan sponsor is management of plan investments. Investment management involves determining a plan’s investment objectives -including return expectations, tolerance for risk liquidity parameters, quality of investments and desired asset allocation mix – and following an investment strategy designed to achieve those objectives.

Plan sponsors should establish and follow a written investment policy and monitor plan-investment strategies and investments regularly. When necessary, you should revise the policy to ensure that your plan is designed to meet your stated objectives and to ensure that plan fees and expenses remain reasonable.

You may instead elect to give participants control of investment decisions regarding their plan assets. When plans are structured in this manner, plan sponsors have the option of allocating full responsibility for investment decisions to participants. If the plan meets certain operational and structural requirements, the plan sponsor will not be responsible for investment decisions made by participants. You can develop an investment menu designed to comply with regulatory guidelines ensuring that retirement plan participants have sufficient information and opportunity to exercise independent control over their account assets.

Meeting The Challenge:

Managing your compliance responsibilities takes knowledge and planning. Some employers choose to shoulder these responsibilities alone, but many seek professional management services to help ease the burden. Talk with your business attorney and your financial adviser about whether you are fully addressing compliance issues and sponsoring a plan that offers valuable investment opportunities to you and your employees.

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