This year, when you make New Year’s resolutions, be sure to have one about checking on the fees you pay to administer your plan. Even a company like Walmart, with its extensive legal resources, recently agreed to pay $13.5 million dollars along with Merrill Lynch for a class action settlement. Without admitting any fiduciary wrongdoing, they agreed to eliminate funds from their plans that carried high fees. A few reminders:

1. Know what fees you pay and be prepared to justify them to your plan participants as well as the DOL.
2. Be sure that record-keeping fees are documented separately from investment management fees.
3. Diversify your plan portfolio, offering choices to plan participants.
4. Communicate all changes to your plan participants and employees – clearly and promptly to avoid any misunderstandings.

Your plan auditor is a good source of information about ways to keep your plan in top fiduciary shape. Another good resource is the AICPA’s Accounting and Auditing Resource Centers.

Once you make an amendment to your plan, how and when you communicate with plan participants is an important ERISA requirement. A case this fall, Helton v. ATT, Inc. (Sept. 16, 2011), points to four important lessons in communication:

1. Answer plan participant questions in a timely and concrete manner

Your communication with plan participants is best put in writing whenever possible. Documenting answers to questions that come from plan participants about their
specific situation keeps everyone on the same page.

2. Prepare and distribute a Summary of Material Modifications (SMM) or Summary Plan Description (SPD)

You technically have 210 days after the plan year in which the changes are adopted to communicate changes. However, you’re better off preparing and distributing
materials as soon as possible to make sure that those affected by the changes can act accordingly. And, the task is complete – it won’t be overlooked with the passing of time.

3. Keep records of how and to whom SMM or SPD notices were sent.

If it’s possible for plan participants to somehow miss a piece of communication about plan changes, you need documentation to prove that the proper notice was sent in the time required by ERISA. Documentation may be as simple as a mailing list of recipients.

4. Remember that all plan participants and surviving beneficiaries need a notice, not just current employees.

This communication tip may seem obvious, but unfortunately, it’s not always followed.

See if any of the following action items apply to your retirement plan and take action prior to December 31, 2011:

1. Make discretionary amendments for plan design changes

Whether a defined benefit (DB) or defined contribution (DC) plan, any plan design changes that you want to be effective for the 2012 plan year need to be adopted by the
end of 2011. Examples of amendments include changes to automatic enrollment or matching amounts.

2. Complete in-plan Roth conversions

Earlier this year, I wrote about in-plan conversions to Roth accounts, part 1 & part 2. If you have an employee who wants to split the conversion amount between 2011
and 2012, be sure that proper documentation is executed prior to December 31, 2011.

3. Amend DC plan documentation if you suspended 2009 required minimum distributions

The Worker, Retiree and Employer Recovery Act (WRERA) of 2008 allowed DC plans to treat 2009 required minimum distributions (RMDs) as eligible rollover distributions. Make sure that your plan document is amended to reflect the 2009 RMD rollovers if you took advantage of this provision. (You were able to defer documentation until now.)

Many workers are staying in jobs past traditional retirement age, and the rules regarding distributions at age 70 ½ can be complicated. Plan participants can make contributions and take required minimum distributions at the same time. As an employer, you’re required to continue making contributions for an employee as long as they are employed and participate in your plan. Here are IRS guidelines that you need to know and follow:

When to distribute:

-         Required minimum distributions (RMDs) are required at age 70 ½ or the year in which the participant retires (if after age 70 ½).

-         In the case of a SIMPLE IRA, SEP or if the participant is at least a 5% owner, RMDs must occur at age 70 ½, regardless of retirement status.

How to calculate required minimum distributions:

-         Generally, the value of the retirement plan or IRA on December 31 of the prior year is divided by the life expectancy of the plan participant.

-         Life expectancy is determined by one of three tables in Publication 590 (Appendix C), based on marital status and age difference of spouse.

When to schedule payment:

-         Participant must take the first RMD by April 1 of the year following age 70 ½ or retirement.

-         In the following years, the participant must take the RMD by December 31, including the year that the distribution was taken by April 1.

Additionally, you must also give your employee the option to continue deferring salary after age 70 ½, if permitted by your plan.

The IRS announced cost of living adjustments for contributions to various types of retirement plans in the 2012 tax year. You can use the information in an IRS easy-to-understand chart to communicate contribution limits to your employees.

In an effort to save money, some companies are terminating their retirement plan options. However, as long as funds are still present in a plan, companies with more than 100 eligible participants remain required to have an annual audit even if the plan is terminated.

The key word is ‘eligible.’ If a plan is active, participants are considered eligible if they have an opportunity to participate, even if they do not elect to do so. If you terminate your plan due to reduction in force, you need to know how many participants (present and former employees and beneficiaries of deceased former employees receiving benefits) you have to determine if you still need an audit. A reduction in force that creates a 20% or greater drop in participants is called a ‘partial termination.’

One important consideration about full or partial termination of a plan is that the matching contributions and other employer contributions must be fully vested for all participants when a plan is terminated. This rule applies regardless of the vesting schedule. A participant’s elective deferrals in a 401(k) plan are always fully vested, but the employer portion is based on the plan document provisions.

Here are the criteria for a fully terminated plan:

-         An established date of termination

-         A description of the benefits and liabilities of the plan as of the termination date

-         Distribution of plan assets as soon as administratively feasible, typically within one year after the termination date

If a plan is a qualified plan, then participants will have tax-favored status for the distribution amount. Otherwise, participants are liable for taxes, or can designate a rollover account to defer taxes on the distribution amount.

The IRS recently announced that employees will be able to contribute $17,000 to defined contribution plans for 2012, a $500 increase over the previous amount. And this week, the DOL announced a new regulation regarding investment advice that frees plan sponsors to be able to provide resources for quality investment advice with certain parameters.  Plans may offer third-party investment advice through:

-         Certified computer models for investment option comparisons

-         Investment advisors who are paid a level fee not dependent on the choice of investment

Plan sponsors will have the opportunity to select the investment advisor, but aren’t responsible or liable for the investment advice. If you use either of the investment advice options, you must disclose the advisor’s fee amount to participants and must submit to an annual audit.

While related to fiduciary responsibility, the latest rule adjustments for retirement plans are not the same as the anticipated new definition of fiduciary. The new definition is expected in early 2012.

For more information, see the DOL’s announcement.

How to prepare for a new definition of fiduciary

By now you have probably heard that the DOL will announce changes to the definition of ‘fiduciary’ in early 2012. The purpose is to strike a balance between protecting consumer accounts from biased investment advice and allowing the securities industry to have enough ability to add value without excess regulation. Briefly, the anticipated revisions:

1. Clarify that fiduciary advice is individualized advice directed to specific parties
2. Clarify fee issues that allow for broker commissions without undue burden on plan participants
3. Clarify the rules about conflict of interest when providing investment advice

Plan sponsors can prepare for the revised fiduciary definition by reviewing plan documents and making sure that the information is included that may need attention:

1. Does the plan document clearly state investment advice relationships?
2. Are fees that are currently part of the retirement plan structure clearly delineated?
3. Are participants given choices that negate opportunities for conflict of interest?

When the new definition is announced, you will want to communicate with plan participants. Detail any impact the definition has on the structure of your plan.

For complete information about the proposed new definition of ‘fiduciary,’ see the DOL Web site.

With different types of distributions come different rules for withholding federal income tax. The IRS has clear, concise guidance on when and how much and to withhold from retirement plan distributions.

You work hard to be compliant with all your fiduciary duties, so make sure that you don’t get tripped up with definitions of compensation for plan contributions. Here are types of errors to avoid:

• Commissions – Contributions to plans may be on ‘auto-pilot,’ pulling from a base salary. Make sure that commissions are included if such are required by the plan document.
• Contribution rate   The rate of contribution used in payroll should match the rate authorized by the participant.
• Cost-of-living increases – Make sure thatcontributions don’t exceed the maximum deductible amount for each year.

Take action:

1. Define all possibilities for compensation and amount of employer contribution in your plan document. Be sure to include timing issues such as how to handle compensation that is earned prior to entering the plan and compensation that occurs upon termination. (Examples include vacation and sick pay.)
2. Review your plan periodically, spot checking specific employee situations. You’ll make sure that your established system is working properly, and compensation-related benefits are consistent with the terms of your plan.

Compensation errors are quite common. They’re also easily correctable. However, if you don’t correct the error yourself and have and IRS audit, your plan can receive a significant financial penalty.

Please talk with your financial advisor or plan auditor to make sure that your plan is on track. As with all things IRS, the details and exceptions are numerous.