American Administration Services Company
Retirement Plan and Investment Funds Basics for Participants
The Participant – Employees and our beneficiaries: the spouse and kids. The greatest responsibility of a defined-contribution plan such as a 401(k) falls to the participant. And while participants are the only link in the chain that is absolutely free from any potential conflict of interest, we still manage to inflict plenty of damage to our retirement plans because of a lack of financial literacy.
The Sponsor - The employer who sets up the plan. Most times, the sponsor constitutes two groups: the company itself, which is usually the "named fiduciary," and the people who work in the human resources or Treasury department who oversee the plan for the company, making them the "functional fiduciary." When the employer's 401(k) committee meets, those functional fiduciaries are the ones who should be looking out for the participants' interests first and foremost. In the best of all conflict-free worlds, the sponsor should pay all the expenses of a plan, rather than let other groups "pick up the costs" -- and pass them back to participants. But in many small plans, it's just not doable.
The Attorney - A pension plan is a complicated legal document, so it's prudent to have an ERISA attorney -- one who specializes in laws associated with the Employee Retirement Income Security Act of 1974, that governs 401(k) plans. The attorney provides legal advice, documents and other resources. Many times, the attorney is from a mom-and-pop law firm, but all the big white-shoe firms have ERISA attorneys as well. The potential for conflicts of interest here don't run very high -- if anything, the "old boy" network might play a role in a few instances. In other words, a big law firm suggests that the sponsor to hire a big bank -- maybe they even note that they handle the firm's plan. What the attorney may not mention is that said big Wall Street firm also brings in the most legal business for the firm. Rare instances aside, this isn't a major area of concern for individuals, except to be relieved that your firm has a good ERISA attorney.
The Auditor - The auditor typically is hired by the company -- and they are necessary for plans with more than 100 participants. As with the attorneys, sponsors can retain auditors from the local mom-and-pop CPA firm that has a 401(k) business or get one from one of the big accounting firms. The best-case scenario is an auditor who is an independent party working exclusively for 401(k) plan sponsors -- with no business relationships with the mutual fund firms, for instance.
The Consultant/Adviser - About 50% of 401(k) sponsors have hired an outside consultant to help choose the funds and the makeup of their plans. They fill a vital function: to advise sponsors on how to manage their plan. This is a huge area, and the services vary widely from the good, the bad and the ugly. The consultant may be from a big Wall Street brokerage & they may be inclined to sell you the funds that they offer in-house. They may be divisions of insurance companies. There are also other big consultant firms plus a growing niche segment of boutique firms (like us, American Administration Services Co., a consulting TPA) that specialize employee benefit plans. They are paid many different ways: commissions, a combination of fees and commissions and fee-only policies. With commissions, they often get paid through mutual funds – (participants ultimately pay) -- 12b-1 fees and finder's fees. Consultants may also have lucrative business dealings with specific mutual funds (or even be owned by or own a mutual fund advisor company) which raises undeniable potential for conflicts of interest. Participants would be well-served asking their sponsor if their plan has a consultant, and if so, how do they get paid and are they truly independent?
TPA or Third-Party Administrator - Virtually all 401(k) plan sponsors hire third-party administrators or TPAs (like us, American Administration Services Co.) that to handle compliance, accounting and back-office functions involved with a 401(k) plan. The TPA may be independent or from a big bank or brokerage that is handling other facets of your plan. TPAs often get paid through revenue-sharing arrangements with mutual fund firms -- such as subtransfer agent fees that may be asset-based or flat fees. These fee arrangements, which can range as high as 65 basis points, may not always be clearly disclosed to participants.
The Custodian - Somebody has to handle all the trades the millions of 401(k) investors make. The custodian is a conduit across which thousands of mutual funds are traded. Few employers have ever heard of the custodian who handles their individual trades. But one little-known custodian has received some troubling press recently, Security Trust Company. According to the complaint, Security Trust allowed Canary to late trade hundreds of mutual funds "under the radar," so that neither the mutual funds nor the investors had any idea that a hedge fund was skimming profits off the top by effectively paying yesterday's prices for today's funds. Security Trust has reportedly said it has not done anything wrong, and hasn't been charged. Many custodians, including Security Trust, also serve as the trustee for a 401(k) plan.
The Trustee - All 401(k) plans, by law, must have a trustee -- the entity that holds participants' money in a trust account that is separate from the employer's assets. The trustee can be a fund company, a broker, a custodian. The trustee's primary function isn't investment advice, but rather to serve as the protector of the participant's money.
The Investment Manager or Fund Company - Investment firms that offer numerous options, usually stock, bond and money-market funds. Typically, these firms offer a large number of their own funds, but increasingly the fund companies also offer options from other investment concerns. They get paid by the expenses their funds charge -- which average about 1.5% a year for actively managed funds. Many times, the big investment company provides a host of other services for your 401(k) plan. Unfortunately, that doesn't mean all the other costs magically disappear to efficiencies -- instead, it typically means participants are simply paying (the same or perhaps even more) to one entity instead of several different vendors.
Other Group Plan Basics
Ø Summary Plan Description (SPD) -An SPD must be prepared and distributed by employers to participants for all employer sponsored group health and welfare plans (health, life, disability and other welfare plans) within 120 days after the Plan is established. Subsequently eligible individuals must be provided a copy of the SPD no later than 90 days after becoming a participant.
Ø Summary of Material Modifications (SMM) If an important change to the plan is to be made in the future, participants must be provided with an SMM to inform them of the change. This document generally must be supplied no later than seven months after the end of the plan year in which the change was made. However, in the case of a change which is a material reduction in covered services or benefits under a group health plan, notice must be provided no later than 60 days after the date the change was adopted. Examples of a material reduction include (but are not limited to) an elimination or reduction in benefits, an increase in deductibles or copays, a reduction in an HMO's service area and the addition of preauthorization requirements.
Ø Summary Annual Report (SAR) Generally, employers with less than 100 participant employees in any one of their sponsored health and welfare plans do not have to provide an SAR to participants. If there are 100 or more participants in the sponsored health and welfare plans at the beginning of the plan year, an SAR must be provided to each participant within nine months after the close of the plan year. The SAR is a summary document outlining the financial condition of the Plan.
Ø # Qualified Medical Child Support Order (QMCSO) - Qualified Medical Child Support Orders (QMCSO’s) are frequently issued by courts and state agencies where a child is born out of wedlock and the father does not voluntarily seek to add the child to his employer-provided group health coverage. Generally, all group health plans are required to enroll a child for whom an employee is required to provide coverage pursuant to a QMCSO. Employers are required to maintain QMCSO procedures to determine whether a submitted order constitutes a QMCSO. A copy of the procedures must be made available to requesting participants without charge.
Ø Women’s Health and Cancer Rights Act (WHCRA) - The Women’s Health and Cancer Rights Act (WHCRA) is a federal law that provides protections to patients who choose to have breast reconstruction in connection with a mastectomy. Most employers will be required to comply with WHCRA as all group health plans that offer coverage with respect to a mastectomy are required to provide benefits for certain expenses relating to a mastectomy. Employers must provide a notice summarizing the coverage upon enrollment of the participant and on an annual basis thereafter.
Ø Consolidated Omnibus Budget Reconciliation Act (COBRA) - Generally, if the employer has at least 20 employees it is subject to the federal law known as COBRA and must provide continuation coverage to qualified beneficiaries who experience a qualifying event. The Plan must provide a COBRA notice to all employees and dependents when they initially become eligible to participate. The employer should either develop procedures to comply with COBRA or alternatively, should retain the services of a third party to assist in COBRA administration.
Ø Certificates of Creditable Coverage - Certificates of Creditable Coverage do not have to be issued for plans covering only one employee. For all other employers offering health insurance plan coverage, the plan must issue a Certificate of Creditable Coverage to individuals upon ceasing to be eligible for employer group health insurance coverage. Additional copies of the Certificate must also be provided upon the request of or on the behalf of the individual at any time within 24 months after the date the individual loses coverage under the plan.
Ø Conversion Privileges - State law may require that individuals be offered a conversion policy upon termination of coverage. This coverage would follow COBRA continuation coverage in the case of a group health insurance benefit terminating. Participants should be notified of any conversion opportunities.
Ø Section 125 - If employees are required to pay all or part of the premium for any of the fully-insured benefits and the payments are made on a pre-tax basis, a Section 125 Plan must be maintained. If such a plan is not maintained, it will create adverse tax consequences for employees. A Section 125 Plan must also be maintained if the employer pays additional compensation to employees for waiving group health benefits.
Ø Family and Medical Leave Act ("FMLA") - During any calendar year when the employer employs 50 or more employees (including part-time employees) each working day during 20 or more calendar weeks in the current or preceding calendar year, the employer is subject to the FMLA. In order to comply with FMLA the employer must adopt a policy in which it articulates its rules concerning the granting of leaves of absence for family or medical reasons, within the parameters of FMLA. One of FMLA's requirements is to continue an employee's health coverage during the leave. However, the employee may be required to continue to pay the same cost for the coverage as actively working employees. If the employee drops coverage during the leave, the employee must be reinstated upon his or her return with no pre-existing condition exclusion or limitation imposed against the individual.
Ø Mental Health Parity Act (MHPA) - The MHPA restricts a group health plan from imposing annual or lifetime limits that are more restrictive for mental health benefits than other medical benefits. The MHPA applies to most group health plans with more than 50 employees. The MHPA does not apply to group health plans sponsored by employers with fewer than 51 employees. The MHPA expired and has been temporarily reinstated. Permanent legislation is expected to be enacted which will impose the same or more restrictive requirements.
Ø Form 5500 - The Form 5500 Annual Return/Report is used to report information concerning employee benefit plans to the Internal Revenue Service (IRS) and Department of Labor (DOL). Generally, employers with less than 100 participant employees in any one of their sponsored health and welfare plans do not have to file a Form 5500. If there are 100 or more participant employees enrolled in any one of the plans (for any health and welfare plan) at the beginning of the plan year, a Form 5500 must be filed for each plan within seven months after the close of the plan year. The IRS and the DOL have authority to assess penalties for late filing. However, it should be noted that a group insurance plan sponsored by a church employer or a governmental employer is exempt from the Form 5500 filing requirement.
Ø Health Insurance Portability & Accountability Act (HIPAA) - HIPAA imposes a variety of requirements on employer group health plans including but not limited to the following examples:
Information on this web site may apply to benefit plans and it is provided for informational purposes only and is not legal advice. We are not issuing any legal advice by providing this information and we are not liable for any penalties, damages or other amounts relating your interpretation and/or use of this information, please always consult with your own legal counsel before you say or do anything.