Do You Know The Top Retirement Plan Mistakes Advisors Make?

Do You Know The Top Retirement Plan Mistakes Advisors Make?

March 11, 2017

Retirement plans are regulated by the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. As such, retirement plan sponsors and administrators must report to the Department of Labor (DOL), the Pension Benefit Guaranty Corporation, and the Department of the Treasury, more specifically, the Internal Revenue Service (IRS). With so many reporting relationships and constantly changing regulatory statutes and interpretations, it is easy to make mistakes.

Advisors play an important role in assisting their plan sponsor clients. You help them navigate the intricacies of sponsoring a retirement plan while maintaining compliance. But, as you very well know, even experienced financial advisors are not perfect. Do you know the top retirement plan mistakes advisors make? Here they are:

Letting Plan Documents Get Out-Dated

Rules and regulations change. Especially in today’s political environment, it is essential to stay on top of legal changes. Many plan vendors will provide the sponsor with amendments, but it is the sponsor’s responsibility to formally adopt them. You need to help your client make all necessary amendments in a timely manner, as the IRS is not flexible with their deadlines.

Not Following Plan Documents

Plan documents can be long and tedious. However, it is important to understand them and consult them upon making decisions. Your recommendations as an advisor always must be in alignment with the plan documents. If you don’t take the time to ensure that they are, your client probably won’t either. You don’t want to be the reason they get into legal trouble.

Allowing The Plan To Fail Tests

No one ever wants to fail a test, and your client’s retirement plan is no exception. There are a number of tests, such as the Actual Contribution Percentage (ACP) and Actual Deferral Percentage (ADP), that your client’s plan may fail if you do not stay abreast of company changes. Whether it’s a changing employee population or the acquisition of a company with a different match formula, you need to help your clients maintain compliance in the midst of changes by staying on top of all required tests.

Excluding Eligible Employees

Often, plan sponsors do not have a good way of tracking eligibility for their retirement plan. If it is based on hours worked, do they have something built into their system to inform them when the requisite hours are reached by each employee? Not enrolling eligible employees can cause a plan to fail testing as well as get expensive for the sponsor. The plan sponsor is required to contribute 50% of what the employee could have deferred and make up for lost earnings. (1) Save your client some money by helping them develop a plan for tracking and enrolling eligible employees.

Imprecise Application Of Compensation Definitions

A big problem that a lot of retirement plans face is the proper application of the plan’s compensation definition. With numerous pay codes used for overtime and time off, it is easy for something to get programmed incorrectly that miscalculates deferrals. You need to make sure that what is happening operationally is in agreement with the plan document.

Improper Participant Loans And Hardship Withdrawals

When it comes to loans from the plan, there are several common mistakes:

  • Loans made that exceed the maximum dollar amount permitted
  • Use of the incorrect loan repayment schedule
  • Miscalculating interest owed
  • Mishandling loan default by a participant

Hardship withdrawals can also be fraught with errors that keep them from meeting IRS and plan document guidelines. It is important to make sure your clients know the proper procedures to follow and the necessary documentation to have on hand before making loans or approving hardship withdrawals.

Forgetting Form 5500

Form 5500 has to be filed with the DOL every year, but sometimes it can fall through the cracks, especially in small companies. With large plans, problems can arise when mandatory audits are not completed in time to be included with the Form 5500 as required. You should help your clients develop an annual compliance checklist that includes Form 5500 with enough time to review it and guarantee completeness. Another option is to outsource the filing of Form 5500 to a reliable third party administrator.

How To Guard Against Mistakes

Hopefully, this list will help you sidestep some of these common mistakes. If this seems like a monumental task, help is available. Working with a pension specialist, such as myself, can take some of the weight off of your shoulders and give your client a better end product.

If you’ve already made some of these mistakes, I can help with that, too. The IRS has several programs for voluntary self-correction of operational errors. I can assist you and your client in navigating the IRS procedures to ensure that they only suffer minimal consequences. I can help get their plan back on track to full compliance.

Email me today at if you need help avoiding or correcting any of these mistakes. Don’t let the IRS or DOL find your clients noncompliant!

About Kenny Phan

Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.