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Internal Controls

Plan sponsors have important obligations as fiduciaries to a retirement plan. They must follow ERISA’s high standards of conduct as they administer the plan and safeguard participants’ assets. The key to managing ERISA fiduciary responsibilities is developing and following prudent plan governance practices like internal controls. Adopting policies and procedures to make certain they are handling plan assets properly and making prudent decisions will help plan sponsors demonstrate that they have met their fiduciary responsibilities.

This is the second in a series of posts about plan governance best practices for plan sponsor fiduciaries. Read the first post.


Five Fiduciary Responsibilities

1. Act solely in the best interests of the plan participants
2. Carry out duties prudently
3. Diversify investments
4. Follow the terms of the plan document
5. Pay only reasonable plan expenses

Administrative Responsibilities

As an ERISA fiduciary to a retirement plan, the plan sponsor must administer the plan according to the terms of the plan document. A plan sponsor must also make sure that the plan is operated in compliance with the rules that apply to retirement plans under the tax code to preserve the tax benefits of saving in a retirement plan.

These fiduciary services responsibilities include tasks such as

  • Enrolling employees when they become eligible to participate in the plan
  • Making contributions according to the formula in the plan document
  • Timely depositing employee salary deferrals
  • Performing annual nondiscrimination testing
  • Filing annual reports with the IRS and Department of Labor
  • Providing notices and disclosures to participants
  • Following plan terms in all aspects of plan operations (e.g., applying correct definition of compensation for various purposes)
  • Keeping the plan document up to date

Retirement plan sponsors typically engage recordkeepers and third party administrators (TPAs) to help them accomplish all of these plan operations and more. However, each plan sponsor is ultimately responsible for making sure their plan is in compliance with all applicable rules.


Importance of “Internal Controls”

Furthermore, all the moving parts involved with operating a retirement plan, combined with ever-changing rules, contribution limits, and employee headcounts, leaves a lot of room for error. Plan sponsors can reduce the risk of compliance errors by establishing policies and procedures to ensure their plan is operating in compliance with their plan document and the tax laws that apply to retirement plans. The IRS calls these policies and procedures “internal controls.” The IRS maintains that by establishing formal procedures for monitoring plan operations, plan sponsors can identify mistakes and prevent future plan errors, as well as reduce the scope and duration of a potential IRS examination. The IRS also notes that routinely following established policies and procedures is one of the requirements to be eligible to use the IRS’s Self Correction Program under the Employee Plans Compliance Resolution System (EPCRS).


Policies and Procedures to Develop

When developing procedures for monitoring retirement plan operations, one of the most important steps is to review the terms of the plan document. A solid understanding of the features and definitions used in the plan is essential to making certain that the plan is being operated as the document requires. Plan sponsors may want to use the major sections of the plan document (e.g., eligibility, contributions, distributions) as a guideline for the types of processes that will be needed. Once drafted, the procedures should be provided to the individuals within the company responsible for plan administration (e.g., human resources and payroll staff). Below is a list of internal controls and processes that the IRS has identified to help promote operational compliance:

  • Compare plan eligibility requirements with employment records to confirm that employees joined the plan once they met the eligibility requirements
  • Verify the plan is using the correct definition of employee compensation for allocations, deferrals, and testing
  • Compare salary deferral election forms with the amounts deducted from employees’ wages
  • Ensure the accuracy of the employee compensation records transmitted to the payroll processor
  • Compare terminated participants’ vesting years of service to the plan’s vesting schedule
  • Verify the validity of rollover contributions to the plan
  • Ensure participants and beneficiaries received required minimum distributions when required
  • Review the plan document periodically for amendments that may be required because of law changes

In addition to developing processes and procedures for monitoring retirement plan operations, plan sponsors and staff should document when and how the procedures are followed to maintain (and prove) consistency over time.


Start Here

Finally, having strong internal controls can provide peace of mind to plan sponsors that their plan is operating properly and can help lessen the scope of a potential audit. Plan sponsors can work with their financial advisors, record keepers and TPAs to

  • Review and understand the terms of the plan document
  • Keep the plan document up to date with any necessary amendments
  • Confirm they are providing all the required information on a timely basis

Read our latest blog post, or see what Benefit Trust can do for you.