By Jeff Chang
Previously, we described the duties and responsibilities of the plan administrator of a public agency 401(a) or 457(b) plan. While it is important for public agency employees to understand the potential scope of the plan administrator position, there is little guidance on “how” the appointed individuals should carry out these additional duties – most 457(b)s don’t come with an owner’s manual.
A typical 457(b) plan is a complex system that is utilized and “stressed” on a daily basis. Like your family car, you need to properly check and maintain its various subsystems – before they fail or breakdown.
Recently, a human resource manager, who serves as her agency’s plan administrator, explained that being the “plan administrator” was pretty easy because she mainly left everything up to the plan’s recordkeeper and only had to deal with occasional requests or problems. While this approach may work in some cases, there are reasons for being more proactive as the plan administrator.
- Recordkeepers and third party administrators are not paid to be proactive and to look for potential problems. Typically, they get paid a fixed fee, have pre-set systems and protocols, and assist with the recordkeeping of the plan according to a compliance calendar. As a result, problems such as excess 457 plan deferrals, improper loans, or incorrect distributions may only be caught after the end of the year when the corrections are a bit more complicated.
- Plan administrators need to be proactive in collecting, and having participants update, beneficiary designations. Typically, outdated beneficiary designations are discovered when there is a death following a divorce (or where the spouse has pre-deceased the participant). It can be awkward and stressful having to deal with multiple potential beneficiaries when the wishes of the deceased participant are not clear.
- When issues arise regarding the interpretation of the plan document, a proactive plan administrator will work toward having the problematic provisions of the plan amended or clarified so that the issue does not come up again.
- It can be difficult and stressful to deal with a participant whose roof has just caved in and is demanding an unforeseeable emergency hardship distribution – particularly when you have never read the plan’s rules or policy regarding such distributions. It is best for the plan administrator to be familiar with policies relating to loans, hardships, beneficiary designations, and domestic relations orders before being confronted with a “live” participant situation.
- If faced with a plan structure that lends itself to excess deferrals, a proactive plan administrator can and should proactively monitor deferrals during the year so the situation can be easily corrected in the current year – not more awkwardly in the next tax year.
- A common mistake made by many plan administrators is to assume that someone else has diligently kept a complete set of dated and executed plan documents and related approvals. Checking ahead of time and making sure that your agency has an organized and complete set of plan documents will make life easier – when, not if, a request for documents arises.
Most recordkeepers are hired to assist and help the plan administrator – not to replace them. Because the plan administrator is ultimately responsible for making sure that the plan operates in accordance with its terms and the applicable rules, it may be a mistake to assume that “everything” is being taken care of by your recordkeeper.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.