Top 10 Pitfalls of a Defined Contribution Plan

Your DC (defined contribution) can be like your car: when it’s running smoothly, it seems easy to run and own. But when they break down or if you neglect them, costs and headaches can be significant. And if you listen to some vendors and advisors who promise everything for nothing, running a DC plan will be easy and painless.

And, like a car, DC plans can run smoothly and not be too expensive if you pay attention and spend time on the front end. ERSIA attorney Ary Rosenbaum reviews the basic responsibilities of a DC plan sponsors as well as liability pitfalls to avoid.

Here are the basic responsibilities of an employer sponsoring a DC plan:

• Acting solely in the interest of plan participants and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently;
• Following the plan documents;
• Diversifying plan investments; and
• Paying only reasonable plan expenses.

And here are the 10 biggest pitfalls according to attorney Rosenbaum:

1. Just because a plan is participant directed, plan sponsors may still be on the hook.
2. Plan sponsors are responsible for the errors and malfeasance by the retirement plan providers they selected.
3. Plan sponsors need to annually review the cost and services of their plan providers, as well as their Plan.
4. Plan sponsors need to know the cost of their plan’s administration.
5. Avoid the one stop shop; plan sponsors should hire at least one retirement plan provider who is independent.
6. Plan sponsors need to keep good records.
7. The hiring of plan fiduciaries must be selected through a process.
8. If plan sponsors are not retirement plan experts, they should hire some.
9. The use of a corporate trustee does not protect the plan sponsor from liability.
10. The ERISA bond does not protect plan sponsors from liability.

So don’t be afraid to look under the hood of your DC plan and pay attention to a few details. Remember, you don’t have to be the expert – just know when and who to call when the engine starts overheating. Better than the state police pulling you over for a DOL audit.