Most plan sponsors today use a prototype plan document that is provided by their record-keeper or third party administrator (“TPA”). Typically the prototype document come in two parts: the base document which contains the standard language for the plan that cannot be changed and the adoption agreement that allows for the many provisions that can be elected to customize the plan to suit each employer’s needs.

When plan sponsors amend their plan, a proper amendment must be made with the necessary employer signatures and board resolutions. Also, all prototype plan documents must be amended and restated every six years. This process was put in place to ensure that all plans are updated for any legislative changes that take place between the restatement periods. Not properly amending and restating the documents as required can result in plan disqualification.

We often find issues with plan documents due to a lack of understanding of the rules, poor process and documentation procedures, or documents completed incorrectly with regard to how the plan is actually operating.

How does this happen? One common problem is that the document or future amendment is never signed or no one has a copy of the signed document or amendment. The employer thinks the record-keeper or TPA has it and the record-keeper or TPA thinks the employer has it. Typically this results from the record-keeper or TPA emailing the document to the employer for signature, and it gets lost in the shuffle and never gets signed. Unfortunately, there is little follow up to make sure this task has been completed.

Another major issue is the adoption agreement does not properly reflect how the plan is operating. This is often the case with the definition of compensation chosen or the matching contribution formula. Without a thorough review of how the plan is set up on the recordkeeping system and how contributions are determined on the payroll system, you run the risk of there being discrepancies that can lead to big problems in an audit. Not following the plan document is a major audit concern and can cost big money if it turns out you were making contributions incorrectly or otherwise not operating the plan according to the plan document. Other areas of concern are vesting schedules, eligibility calculations, loan procedures and distributions.

Be particularly alert to this issue when changing record-keepers during the document “mapping” process. Often providers map over provisions without a complete understanding of how the plan is actually operating or intends to operate going forward.

Everyone has some level of concern and awareness regarding being sued for poor investment performance or investment oversight. The reality is that far more employers have had to pay fines and restitution to the plan over the administrative aspect of the plan. The plan document is the governing instrument. Good process, a fiduciary file, and competent handling of plan documents, amendments and restatements will help you avoid these pitfalls.