Managing the 401(k) Data Deluge and How to Avoid Problems

No, that's not the Matrix pictured on the right. It's simply a visual representation of a special report by The Economist a little over three years ago, Data, Data Everywhere,

In that report, The Economist reported that Wal-Mart handled more than one million customer transactions every hour, feeding databases estimated at more than 2.5 petabytes. That's the equivalent of 167 times the books in America's Library of Congress.

401(k) plans don't have nearly the Wal-Mart-like amount of data, but it can still seem overwhelming. Consider the array of transactions that flow from a 401(k) plan - including contribution sources such as employee pre-tax and Roth after-tax contributions, employer contributions, and rollover contributions. Not to mention investment changes such as allocation changes, and account re-balancing,

The result?  Mistakes happen. We all know the litany of what can go wrong, and in many cases, has gone wrong:

  • The plan document is not in compliance with the law and Internal Revenue Service and Department of Labor regulations.
  • The terms of the plan have not been followed, e.g., definition of compensation .
  • Employee contributions have not been timely deposited.
  • The 401(k) limits have been exceeded.
  • The plan does not meet the non-discrimination rules.
  • The loan provision has not been properly administered.

Fortunately, the Internal Revenue Service (IRS) and the Department of Labor (DOL) have established self-correction programs to fix plan mistakes. But the key to managing the 401(k) data deluge and avoiding mistakes is prevention.

In the view of the IRS, it’s about establishing and maintaining good internal controls, and has been holding a series of teleconferences on just that.

One last week was conducted by Monika Templeman, Esq., Director of Employee Plan Examinations and Janice Gore, Employee Plans Exam Area Manager in our own Great Lakes Region. They stressed that good internal controls can:

  • Eliminate or reduce errors in plan administration
  • Help identify and correct errors using the Self Correction program
  • Help a retirement plan audit go smoother

They also announced that IRS has repackaged the 401(k) Questionnaire (as the QSAT (Questionnaire Self Audit Tool), scheduled to be released in 2013. The QSAT will help plan sponsors find, fix and avoid costly mistakes, and provides questions an IRS examiner would ask.

There is another benefit to having good internal controls. If you’re a Plan Sponsor, Plan Administrator, or anyone who exercises discretion or control over plan operations, you are considered a fiduciary. Good internal controls are essential to properly meeting your obligations… and avoiding personal liability.

How to go about it? That’s a topic for another day.

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