Top 10 401k Audit Problems

February 4, 2014

When the Internal Revenue Service (IRS) launched a series of “LESE [Learn, Educate, Self-correct and Enforce] examinations” last year, one of its intentions was to discover trends in compliance failure among qualified retirement plans.

Here are the most frequently cited compliance errors.  By avoiding these mistakes, compliance experts say sponsors can go a long way toward navigating—or avoiding—IRS audits.  Full article over at Plan Sponsor.

1. Failing to amend plan design to comply with current law in a timely fashion

2. Failing to procure adequate fidelity bonding

3. Not following plan terms for loan and distribution processing. 

4. Neglecting to allocate contributions and forfeitures in keeping with the plan terms.

5. Failure to properly run nondiscrimination tests.

6. Failure to deposit elective deferrals into the trust in a timely manner.

7. Using an incorrect definition of compensation per the plan terms

8. Failing to monitor plan contributions to ensure they do not exceed dollar limits or the deductible limit for employers.

9. Distributions of excess deferrals are incomplete, not timely or improperly calculated.

10. Not filing the final Form 5500. 

Pro Tip:  The IRS chose plans with invalid business codes on their 5500’s – if you can’t get your own business code right, what are the chances you are running your 401(k) plan properly!

@tomob

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Fidelity sued by employees over 401k plan AGAIN

January 16, 2014

Reported over on the FRA PlanTools blog Fidelity is being sued by their own employees again.

The plaintiffs here generally allege that the fiduciaries to the Fidelity in-house plan violated ERISA sections 404 and 406 because Fidelity failed to rebate back the revenue sharing it collected from the all Fidelity mutual fund lineup in the plan beyond what would have been reasonable and permitted.

The plaintiffs claim the plan should have negotiated a direct recordkeeping arrangement with Fidelty, like other large plans do. They claim that all the way back to 2007, a reasonable per head fee would have been $20-$27. Instead, they claim that Fidelity was collecting approximately $335 per head through the revenue sharing from the plan.”

This is the problem with bundling – even in the new era of full fee disclosure.  It is still way too hard to separate the cost of administration from the cost of investment management.  I can only hope that this continues to force the issue of full, clear and explicit fee disclosure for 401(k) service providers.

@tomob