Most of the nation's more
than 600,000 401(k) plans are fine. But that doesn't mean you should let your
guard down when you get the statement for your employer-sponsored retirement
plan in the mail. In fact, experts say you should always be checking to see if
all is right with your plan.
Recent research from Judy
Diamond Associates, a Washington, D.C.-based firm that publishes pension and
welfare-plan data for the financial services and insurance markets, reveals
that roughly one in 10 plans, or 63,349 plans, issued in 2012 what are called "corrective
distributions."
A plan might issue a
corrective distribution for what are called excess deferrals, or excess
contributions, or excess aggregate contributions, or excess annual additions
distributed. If corrective distributions are being issued frequently,
that would be cause for concern.
"Plans that issue
corrective distributions may be experiencing flaws in the way their plans were
designed or rolled out," according to Eric Ryles, a managing director with
Judy Diamond Associates.
What can you do to protect
yourself against corrective distribution? Ask your plan administrator or
pension professional whether your plan is currently up to date with current law
changes, and whether it has set up operating procedures and appropriate
internal controls for the plan.
Ask
also whether your plan administrator is aware of your plan's terms and that
your plan is timely amended for law and regulatory requirements. According to
the Internal Revenue Service, failure to timely amend can cause the plan to
become non-qualified.
What are some
other red flags?
Frequent
changes — Frequent and
unexplained service provider turnover/conversion, along with frequent changes
or no changes to the plan's investment options, which would be equally
worrisome.
Plan sponsors generally evaluate
their plan providers once every three years to make sure they are getting the
right plan and the right mix of investment options at the right price for their
workers. If not, they might renegotiate their contract with their existing
provider or switch vendors.
But employers that change
providers more frequently than once every three years should give plan
participants reason to worry. Why so? Advisors often receive a commission when
plan sponsors change providers. And more often than not, plan participants pay,
either directly or indirectly, that commission."
Watch those
fees — 401(k) plans are
now required by the Labor Department to disclose the fees plan participants pay
for their retirement plan and investments. Consider it a red flag if your plan
isn't complying with the new regulations or if you're paying excessively high
fees. According to Ryles, nearly 46,000 401(k) plans had high administrative
fees.
Self-dealing — If your plan isn't providing much in the way of
investment education — such as meetings and online or printed material —
consider that a red flag. Self-dealing
might be one reason why plans aren't providing much in the way of education or
services.
Are your contributions being
misused? — Plan
participants should also review the answers to "compliance questions"
on their plan sponsor's Form 5500. The answers to these questions would reveal
obvious red flags:
1) Did
the plan have a loss, whether or not reimbursed by the plan's fidelity bond, that was
caused by fraud or dishonesty? Only about 200 401(k) plans answered
"yes" to this question in 2012, according to Ryles.
2) Did
the plan hold any assets whose current value was neither readily determinable
on an established market nor set by an independent third-party appraiser?
3) Has
the plan failed to provide any benefit when due under the plan? Some 1,130
plans answered "yes" to this question in 2012.
4) Was
there a third-party provider to the plan, a consultant or broker for instance,
who did not correctly disclose the money they made from the plan?
What to read — Plan participants can stay abreast of their 401(k)
plan by their employer's Form 5500 filing, the government-required pension
filing that details, among other things, compliance violations. You can find
your employer's Form 5500 at websites, such as FreeERISA.com. Of note, 5,114 plan sponsors did not file Form 5500 in
2012, according to the Judy Diamond research.
"If you care about your
401(k), [you] can take five minutes and [you] can review their employer's Form
5500," says Ryles. "[You] don't have to be [an expert] in how to read it.
I would never expect that of a plan participant. But there are a couple real
obvious things like the compliance questions. For the company to conceal that
is a big deal."
Also
read the Summary Plan Description or SPD, a document containing a comprehensive
description of a retirement plan. You can get a copy of the SPD from your
employer's human resource department.
Click
here for the original article in USA Today.