Article
Retirement plans qualified under the Employee Retirement Income Security Act (“ERISA”) should maintain certain policies, according to guidance provided by the Department of Labor (“DOL”).
Having well-defined written policies and in place is also beneficial for employees involved in plan administration. These guidelines outline the appropriate steps to be taken when dealing with various situations, thereby enabling more efficient job performance.
The Essentials
Some service providers are eager to provide policy templates to employers in order to help them construct their own. However, legal counsel should be engaged to review any attempt a plan sponsor makes to build their own policy statements.
Here is a list of the most essential written policies for inclusion in a retirement plan’s governance documents.
- Loan Policy: Why is it necessary?
The prohibited transaction rules stipulated by ERISA and the Internal Revenue Code prohibit loans from a 401(k) plan to plan participants unless specific requirements are met.Typically, 401(k) and 403(b) plan documents contain provisions regarding loans. However, it is vital to review and establish a clear loan policy that complies with legal requirements. This policy should outline the eligibility criteria, loan limits, repayment terms, and any other relevant details.
- Investment Policy: Why is it necessary?
An investment policy provides a framework for making informed decisions regarding the retirement plan’s investment options. It establishes guidelines on asset allocation, diversification, risk tolerance, and monitoring procedures.Developing a comprehensive investment policy ensures that the plan’s investments align with the participants’ objectives and risk profiles. It also helps mitigate potential fiduciary liability by demonstrating prudent investment practices.
- Conflicts of Interest Policy: Why is it necessary?
ERISA abhors conflicts of interest. In response, a conflict of interest policy is meant to help ensure that the organization has a procedure in place under which the affected party will inform the fiduciary committee about all the pertinent details regarding the issue when actual or prospective conflicts of interest develop.Surprisingly, ERISA does not require employee benefit plans to be free of conflicts of interest. Nonetheless, it does demand that the fiduciaries look for conflicts and if any are found, decide whether they are acceptable. (Be sure to document the deliberations that led to the conclusion.)
An employer that sponsors a retirement plan that is sold and managed by a lender from whom the company obtains funding for its operations is an example of a situation where there is a conflict of interest. Other common scenarios involve recordkeepers that provide investment options.
- Missing Participant and Uncashed Check Policy: Why is it necessary?
Four major topics comprise the makeup of this policy. - Mandate accurate census information for the plan’s participant population.
- Define participant communication strategies.
- Describe how to conduct missing participant searches.
- Document the procedures followed, and actions taken.
- Data Security Policy: Why is it necessary?
The federal government requires employee benefit plan sponsors to appreciate Personally Identifiable Information (“PII”) and to handle it securely. This is a fiduciary matter.
The DOL maintains a regulation that requires employers to take appropriate measures that protect the confidentiality of personal information relating to the individual’s accounts and benefits. (ERISA Regulation Section 2520.104b-1(c)(1)(i)).
The primary purpose of a data security policy is to provide an appropriate foundation on which a process workflow can be constructed. The goal of the policy and the process workflow is to protect the privacy and security of a retirement plan participants’ data and assets.
When developing the policy, serious attention needs to be given to the activities of a plan’s third-party vendors.
- Qualified Domestic Relations Orders Policy: Why is it necessary?
In general, ERISA does not permit a participant to assign the participant’s interest in a retirement plan to another person. A limited exception to the anti-assignment rule is provided for assignments of retirement benefits through qualified domestic relations orders (“QDRO”). A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.
A domestic relations order can be a QDRO only if it creates or recognizes the existence of an alternate payee’s right to receive or assigns to an alternate payee the right to receive all or a part of a participant’s benefits. The QDRO policy stipulates the methodology for making that determination.
These six policies are essential for the effective administration of a defined contribution retirement plan. By implementing clear policies, plan sponsors can ensure regulatory compliance, protect participants’ interests, and facilitate efficient plan management.
A periodic examination from a qualified expert to ensure policies are implemented properly is an industry best practice.
