Avoiding common costly retirement plan errors

By September 10, 2018Sponsor Insight

By Kevin Kidwell, vice president of national tax-exempt sales, OneAmerica®

As an employer, it’s likely gratifying for you to look out for the welfare of your employees, particularly when it comes to helping them build a retirement.

Less enjoyable though may be the administration and compliance of your nonprofit’s retirement plan. As an employer, you have responsibility, however, to work to avoid the common errors and pitfalls that are discovered during Internal Revenue Service (IRS) and Department of Labor (DOL) audits.

Here are my suggestions to avoid them.

Common plan errors

First, ask yourself what you think costs more to remediate — a malpractice suit, or a correction to your retirement plan? Any guesses as to the average cost of correction?

You might be surprised that the costs are nearly identical.  In 2015, the average DOL audited fine was $424,000, and the average malpractice suit was $425,000. [1]  While both costs may seem astronomical, there are ways to prepare and reduce your risk of an audit-plan failure resulting in a fine.

There are two types of government audits that your plan may be exposed to, the first from the IRS and/or the second from the Department of Labor.

The IRS tends to focus on more tax-related issues, such as current deductions or delaying the recognition of income. Also within the IRS’s jurisdiction is regulation compliance particularly that pertain to plan qualifications, including nondiscrimination testing and all limits.

The IRS also looks at plan-document compliance. This includes consistency among all plan documents and operation, compliance with constantly changing plan eligibility regulations and administration.

More recently, the IRS has become concerned with improper investment valuations in cases where an asset is illiquid (so few retirement plan participants and a low volume of activity, and not easily converted into cash) or is not readily valued, which can cause an undervalued or overvalued benefit distribution.[2]

The labor department focus tends to be on audits, ensuring that a plan is maintained for the benefit of the employees. This office is concerned about things such as fees, eligibility and timing of contributions.

Even most plans not subject to the federal law that protects plan participants, known as The Employee Retirement Income Security Act of 1974 (or ERISA), are subject to state law, which contains language that mirrors ERISA and its “prudent expert” rule, which is the highest standard of care possible. It encompasses the standard fiduciary obligations, but in addition requires their application in a manner that an expert in the field would use. In presentations that I make about the “Prudent Expert Standard” and “ERISA” I typically include a lot of legal terms.

My suggestions:

  • Document the plan and processes
  • Follow the provisions of the plan and processes
  • Make sure the fees you are paying for services are reasonable
  • If you aren’t sure or have questions in all of those areas, find an experienced financial professional who can help you

In a nutshell: If Joe Smith has a retirement plan, the intent is to keep the maintenance fees reasonable and ensure that the beneficiary money is invested properly.

It’s worth the effort

Preparing for an audit can be a time-consuming process. You will likely be asked to provide copies of documents, procedures and disclosures without a lot of warning or much time to fulfill the request.  These may include:

  • Plan document and amendments
  • Investment process documentation/Investment Policy Statement
  • Board/committee meeting notes
  • Fee disclosures
  • Effective notice of eligibility/Annual meaningful notice
  • Loan/ Qualified Domestic Relations Order (QDRO) procedures
  • Current 5500 and audit report

A well-designed retirement plan can help to provide meaningful solutions for your employee base.  It also allows you to recruit talented employees and find ways to incentivize through retirement.

When I’ve done presentations on audits, whether tax-exempt or 401(k) audiences, I’ve seen people in the audience cringe. But our strong suggestion is to work with experienced professionals to minimize the potential for the audits ever happening. Planning, preparation and collaboration with retirement professionals can lead to a much less stressful situation down the road.

Kevin Kidwell is vice president of national tax-exempt sales and works to provide ideas, knowledge, and information – both technical and practical – to facilitate improved plan and participant outcomes.

Since joining OneAmerica in 1988, Kevin has held various positions within the Retirement Services division.

Beginning in 2000, his exclusive focus has been on healthcare and tax-exempt organizations.


OneAmerica® is the marketing name for the companies of OneAmerica.

The views and opinions expressed in this material are solely those of the author and do not necessarily reflect the views and opinions of any of the companies of OneAmerica. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Products issued and underwritten by American United Life Insurance Company® (AUL), a OneAmerica company. Administrative and recordkeeping services provided by McCready and Keene, Inc. or OneAmerica Retirement Services LLC, companies of OneAmerica which are not broker/dealers or investment advisors.

Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary or investment advice.

Registered Representative of and securities offered through OneAmerica Securities, Inc., a Registered Investment Advisor, Member FINRA, SIPC.

Not affiliated with or endorsed by the Social Security Administration, the Centers for Medicare & Medicaid Services, or any governmental agency. 

[1] Source: What is the Bigger Liability-a 401(k) or a Malpractice Suit-By: Mike Haynes, Director, Retirement Plan Services

[2] Source: Audit survival tips for retirement plans By: Tom Swain, FSA, EA, FCA, MAAA, Bryan, Pendleton, Swats & McAllister, LLC (BPS&M)

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