Robert Powell / USAToday
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.
'Ninety-nine percent of plan sponsors are trying to do the right thing, but the rules are complex and technical and ever-changing,' says Jason Roberts, CEO of the Pension Resource Institute, a retirement-plan consulting firm with an office in Manhattan Beach, Calif.
Complex and technical, indeed. 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.
'The Labor Department pays a lot of attention to (corrective distributions),' says Roberts. 'The majority of enforcement from the Labor Department is around distributions and contributions and the timely remittance of any monies to participants.'
Now there's little reason to worry if a plan issues a corrective distribution for legitimate reasons. 'Maybe there was a change in payroll providers or a new third party administrator or a new record keeper,' says Roberts. 'Maybe it was just some sort of an error due to different systems and linking up the systems.'
If corrective distributions are being issued frequently, that would be cause for concern. 'That would signal to me that either the plan sponsor isn't carefully monitoring the service provider or the plan sponsor isn't as attentive to the requirements as they should be,' says Roberts.
Others agree. '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.
According to Roberts, employers, or what are also referred to as 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? Advisers often receive a commission when plan sponsors change providers. And more often than not, plan participants pay, either directly or indirectly, that commission. 'That's an easy one to spot,' says Roberts. 'If your statement has a different logo on it every couple years, you want to get to the bottom of why the conversion is necessary, and who's paying for it.'
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.
So how might you know if your plan isn't complying with the Labor Department's new regulations?
Ask your plan if they have 'comparative benchmarking documentation to substantiate the reasonableness of fees,' says Michael Kane, founder and managing director of Plan Sponsor Consultants, a retirement-plan consulting firm headquartered in Atlanta.
What would raise a red flag, however, would be 'high fees in the absence of value' as well as incomplete reporting and/or unexplained expenses on statements, Roberts says.
Roberts also recommends looking for unexplained expenses on your statements or what are called 404a-5 disclosures, the fee disclosures that are required to be distributed to participants.
Don't be surprised as well if your firm is making fee disclosure mistakes. In nine out of 10 cases, Kane's firm has found that Schedule C of Form 5500, the document retirement plans are required to file with the Labor Department, don't match plan sponsor fee disclosures. The plan sponsor fee disclosure is more accurate and updated quarterly, he says.
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. According to Roberts, self-dealing might be one reason why plans aren't providing much in the way of education or services. In some cases, Roberts says the brother-in-law or the golfing buddy of the CEO is the plan's adviser. Or perhaps a bank might extend favorable credit to an employer in exchange for managing the company's 401(k) plan.
And that kind of self-dealing, says Roberts, 'suggests that the plan sponsor might be dealing with somebody who's not proficient and might not be providing the best advice to plan participants.'
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 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), they can take five minutes and they can review their employer's Form 5500,' says Ryles. 'They don't have to be experts 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.
'If you want to be as informed as you possibly can be, then you should be reading everything sent to you,' says Roberts. 'You have the right to ask additional questions and ask for additional information from your plan administrator.'