Blog
November 1, 2018
Don’t Throw the Baby Out With the Bath Water!
In medieval times, people shared scarce and sacred bathwater and after a baby had been bathed, the water was so murky the baby was in danger of being thrown out with the bathwater! A common misconception about 401(k) plans is that companies are stuck with their initial 401K plan as it was originally designed….and that no changes can be made without throwing out the plan and starting over. The parallel in the former analogy should be pretty obvious.
This idea of starting over arises when you change investment/recordkeepers. Although employers do not discard their Plan Document, they may confuse the government approved Plan Document with their new investment/recordkeeping contract; or say they are terminating the Plan when actually all they are doing is changing investment companies.
If your plan was not designed by a TPA or attorney, the administrative policies may have been imposed on you and not fully explained. Changing investment company recordkeepers is a change and not a termination and a time to review plan operations. Plan providers may plug you into their system, but may not aware of what the Plan Document actually includes. We recommend you avoid this by asking, “are we operating the plan in accordance with the Plan Document?”
What is the best course of action when you want to make changes and how do you avoid wrecking the paperwork?
Check with your TPA and/or the ERISA attorney about how the plan is managed in conjunction with the Plan Document. If necessary, have them amend the Plan to be in alignment with how you want the plan to be managed. This is very important because down the road the government may say your Plan is not tax qualified because the recordkeeping didn’t match the document provisions.
In summary, the Plan Document is considered a “rule book and road map” for the retirement plan and it is required by the government to make the plan legal. The investment /recordkeeper is similar to an insurance policy. There will be language meant to lay out the terms of their services, but nothing about what you must do to operate your retirement plan.
Would you like to know more valuable facts about amending retirement plan designs and make things more simple? Call our experienced team at BEI at 800-899-9141 or email to Planoperations@benefitequity.com and “don’t throw the baby out with the bathwater.”
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.