United States

Performing a retirement plan self-checkup


When an employer sponsors a retirement plan for its employees, there are many considerations regarding the plan’s provisions. Employers need to step back periodically, perform a plan checkup and ask themselves if the plan is accomplishing their goals while maintaining compliance with all regulations.  Is the plan working for the employer as plan sponsor, as well as for the participants?

Is your plan healthy?

There are a number of areas to explore to determine the health of the plan: 

  • Average participation rate: Are the majority of eligible employees actively engaged in the retirement plan?
  • Average deferral rate: How much of their compensation are eligible employees deferring into the plan for their own retirement?
  • Industry averages: How does the plan compare to the industry average for employee participation in numbers and contribution amounts?

If the answer to these questions indicate an ailing plan, there are options that can help improve the overall health of participation and savings regarding the plan:

Auto‑enrollment and auto-escalation: This option means the plan automatically enrolls newly eligible participants into the plan at a stated rate for deferring compensation, then automatically escalates that rate, for example one percentage point, after a year anniversary. Participants have the option to opt-out of those features.

Improved employee education, communication and enrollment: Utilizing current technology can help employees enroll, get information, communicate and keep up with their plan’s retirement benefits.

Higher employer match threshold: Plan sponsors can motivate eligible employees to increase their participation and deferral rate if plans have a higher employer match contribution. An employer match may also be a tool that can help address employee retention and hiring.

Simplified investment options: People can be concerned about how to invest. Simplified investment options, like target date funds, is one way for participants to feel more comfortable. There is a value in simplicity for plan participants.

Diversification: Target-date funds have become very popular with retirement plans. It makes it easier for participants to determine the appropriate mix of investment options. An increasing number of contributions and elective deferrals are going into target-date funds. It can be a great way to diversify plan assets as well as to adjust as participants move closer to retirement.

Highly compensated vs. non-highly compensated employees

There are plan compliance tests that the IRS uses to make sure that a plan does not discriminate in favor of highly compensated employees (HCE) over the non-highly compensated employees (NHCE).

One such compliance test is the coverage test. In general, the coverage test is much like a body count. How many of HCEs are benefitting under the plan compared to NHCEs. Does the plan cover enough of those participants? The plan can exclude certain classification of employees such as union employees (collective bargaining employees) and it can exclude nonresident aliens without impact to its coverage test results. However, if the plan excludes other specific classification of otherwise eligible participants, plan sponsors must show the plan passes the coverage test with the exclusion of the classification. The actual deferral percentage test and actual contribution percentage test are additional annual compliance tests that may apply to the plan.

Among the options that can contribute to the health of a plan is the safe harbor contribution. A safe harbor plan contribution can take the form of a mandatory match or non-elective contribution. This option can help motivate individuals to participate in the plan.

Is your plan in compliance?

Three regulatory agencies provide oversight of retirement plans: the IRS, the U.S. Department of Labor (DOL) and the Pension Benefit Guaranty Corporation. Retirement plans must comply with a long list of rules under these agencies and, as a result, errors sometimes occur in the administration of a retirement plan.

Types of errors commonly discovered in retirement plans include:

  1. Plan document errors: A plan document in its form does not comply with the IRS or DOL requirements, such as a delinquent execution of legislative amendments or individually designed plan documents containing errors or omissions, resulting in a plan document failure.
  2. Operational: The failure of the plan’s operation or administration to follow the terms of the plan document.  For example, if a plan document says that the plan provides for auto-enrollment, but the operation of the plan does not auto-enroll eligible employees on a timely basis, an operational failure has occurred. Plans must pass annual compliance tests every year to show the plan operated in compliance with the terms of the plan document and in compliance with the IRS and DOL rules.
  3. Fiduciary: This is the failure to operate the plan exclusively for the benefit of participants and performing duties at a level less than that of a “prudent expert.” Plan sponsors are fiduciaries to the plan, and must maintain a certain level of compliance with all of those rules.
  4. Nonexempt transaction: Transactions between the plan and parties-in-interest are generally not permitted, unless certain exemptions applyA retirement plan is required to be operated for the exclusive benefit of plan participants.

What happens if a plan is not in compliance with the rules?

The IRS may disqualify a plan from its tax-exempt status if it fails to be in compliance with the rules. If a plan is disqualified: (1) the employer loses its tax deduction for its contributions to the plan; (2) the income from the plan’s trust is taxable; and, (3) the participant would include in income any employer contributions made to the trust for his or her benefit to the extent vested in those contributions taxation of all or a portion of the fully vested account balance of participants. The IRS may disqualify the plan retroactively from the plan’s inception, for a number of years or from a certain date.

How are plan errors corrected?

Correction of plan errors, in general, require that participants and the plan must be placed in the position they would have been had the error not occurred. The IRS’ Employee Plans Compliance Resolution System (EPCRS) Program allows plan sponsors to correct plan errors under the Self Correction Program (SCP), the Voluntary Correction Program (VCP) or under the Closing Agreement Program (CAP).

Best practices for a healthy plan

Following are some best practices to follow:

  • Review plan compliance annually
  • Review plan document compliance annually
  • Ensure a sound risk mitigation process
  • Benchmark periodically
  • Understand the balance of service and fees to the plan and participants
  • Measure periodically to determine how to influence participation
  • Integrate education with other financial topics, debt management, emergency savings and the like
  • Leverage the technology available through providers
  • Improve diversification through a plan refresh or maybe a re-enrollment initiative

For more details on performing a retirement plan health check-up, listen to the webcast.


How can we help you?

To discuss how our team can help your business, contact us by phone 800.274.3978 or