Business Owners Face Steeper Retirement Plan Compliance Error Fines
The U.S. Department of Labor this August significantly increased its penalties for retirement plan sponsors who get caught making compliance errors before they correct them on their own. What previously might have only been a fine of a few hundred dollars through the DOL’s Voluntary Fiduciary Correction Program can instead result in penalties high enough to force a small business to shutter its doors.
The DOL says the penalties have been adjusted for inflation, the first time they have done so since 2003. Moving forward, these penalties will be adjusted for inflation annually beginning January 2017.
Shawna Christiansen is a retirement consultant at Retirement Benefits Group in San Diego, a firm that specializes in providing customized retirement plan consulting services, executive benefits, wealth management and retirement management services to individuals and companies of all sizes throughout the United States.
She says that one of the steepest penalty increases surrounds Form 5500. Plan sponsors who do not file this annual report required for retirement plans now face a daily fine of up to $2,063. Previously, the fine was up to $1,100 per day. Christiansen says many of these penalties can stem from unknowing omissions, not just overtly intentional actions. And that, she says, may be a result of an absentee plan advisor.
“With small businesses facing the potential of steeper penalties, it’s more important than ever before that they are fully aware of the work their plan advisor is doing for them,” she says. Christiansen says that a majority of small market retirement plans (with less than $50 million in assets) have advisory fees built into the expense ratios of the investments they offer to their participants. These fees are known as “12b-1 fees.” However in her experience, far too few plan sponsors have ever met the advisor receiving those fees.
“If you haven’t seen your plan advisor in a year, you need to,” she says.
An annual meeting with a retirement plan advisor can help ensure that the plan is passing the non-discrimination tests important to maintain the plan’s tax qualified status and the plan sponsors are managing their fiduciary obligations. “Some of these penalties are so high, they can push a small company out of business, a huge consequence for a rule they may not know exists,” Christiansen says.
She discovered this year that a new client’s previous advisor had never once met with the client to review the plan’s compliance, this failure to meet with the client resulted in a failure to file the company’s past two Form 5500s, which could have resulted in a huge penalty of up to $1.5 million over two years. Instead, her client only paid an $800 voluntary correction fee.
“If you hire a new retirement plan advisor for your company’s 401(k) plan, ask that person to conduct a full review of the plan,” she says.
A thorough review should include:
1. Benchmarking (fees, vendors and plan design)
2. Completing the DOL audit checklist;
3. An analysis of how the fees are paid; and
4. A thorough review of the investments options available to participants
Several failures (easily identified on a 5500 filing) can attract the attention of the DOL. Examples include a gap in the 5500 filing, late contributions, no fidelity bond and others. “Work with a consultant who will help maintain a fiduciary file that will ensure you are well prepared for potential DOL audits,” Christiansen says.
Ms. Christiansen is a Registered Representative with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Retirement Benefits Group™, a Registered Investment Advisor and separate entity from LPL Financial. Retirement Benefits Group is a registered trademark of Retirement Benefits Group, LLC. All rights reserved.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.