There are some things in life that we do because they are good for us, not because we particularly enjoy them. Things like getting root canals and eating spinach. For your business-owner clients, one of those things is sponsoring a retirement plan.
They know that having a retirement plan available is a huge benefit to their employees and themselves and it boosts the attractiveness of their company to top talent. But the work, the details, and the minutiae regulation all make your clients wish they were getting a root canal instead.
Because of this, a lot of plan sponsors make mistakes. The combination of complex rules and a lack of interest in mastering them is the perfect recipe for errors. Unfortunately, errors can be costly. Here are some of the biggest defined benefit plan mistakes I see and what can be done about them.
Complex regulations lead to complex plan documents. Sometimes those charged with implementing the plan simply don’t understand the documents themselves. If you’ve ever read through a defined benefit plan document in its entirety, you understand. Lawyers have to specialize in retirement plan law, so it’s unfair to expect the average Human Resources employee to be able to understand it all.
As such, I see a lot of operational errors in defined benefit plans, things such as using the wrong definition of compensation to calculate benefits or including or excluding employees from the plan incorrectly.
Fixing these errors is a two-step process. First, your client has to identify the errors. Those implementing the plan cannot be expected to find them. They are already doing what they think is right. If your client waits, the IRS may find them, but then they will have an even bigger mess on their hands. Another way to discover operational errors is by having the plan audited by a pension specialist. That way, errors can be identified and corrected before the IRS gets involved.
Once errors are uncovered, they have to be fixed. Usually this is simply a matter of adjusting policies and procedures so that they align with the plan document. Another important piece of the correction is making sure everyone working with the plan has a clear understanding of the plan documents to prevent future operational errors.
Plan Document Errors
The other kind of defined benefit plan mistakes I always see are plan document errors. This happens when the plan document itself does not accurately reflect the intentions of the plan sponsor. This can occur because the sponsor doesn’t sufficiently communicate their desires when the documents are written up, the wording used is ambiguous and not clearly defined, or through simple typographical errors.
For example, the wrong box is checked on the adoption agreement or the language used is too vague and can be interpreted in multiple ways. Or, another common mistake, the definition of compensation used doesn’t reflect the sponsor’s wishes because they don’t understand all of the different components counted as compensation.
Often, a plan needs to be formally amended in order to correct these errors. Plan amendments are time-consuming and allow the possibility of even more errors. Because of this, it is wise to keep the plan documents as simple as possible from the beginning. The more complicated they become, the more opportunity there is for misinterpretation and mistakes. The best way to both avoid and fix plan document errors is to work with an experienced pension specialist when drafting plan documents or amendments.
How I Can Help
There’s a good chance that you didn’t become a financial advisor because you love studying the Employee Retirement Income Security Act of 1974. You want to help your clients succeed with money, and helping them with the retirement plan their business sponsors is incidental.
To provide the best possible service to your clients, you should consider partnering with a pension specialist. I can help your clients identify and correct their defined benefit plan mistakes so that they can avoid the expense and hassle of having the IRS get involved. I can take on the responsibility of the retirement plan so that both you and your clients can focus on doing what you love and excel in. Email me today at email@example.com to find out more about how we at FinancialFocus Retirement Plan Services can partner with you to help your clients succeed.
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.