FIDUCIARY SAFE HARBORS
When declaring them in your ERISA plan be sure they are being followed
Safe harbors are well known statutes provided to protect from liability those that that declare and implement them … properly.
Unfortunately, we often see safe harbors in the plan documents yet in operation the plan is not adhering to the requirements to receive the benefits of the safe harbor. We have even seen cases where a safe harbor is declared but has not been available for years. This goes to prove that periodic review of the plan documents and implementation are important.
Let’s look at some of the most common Safe Harbors:
Section 404(c) is probably the most common safe harbor and one that nearly every plan adopts because it is believed to be simply related to the investment menu, plan design and participant disclosure. If declared, implemented and followed this safe harbor passes investment liability to the plan participants. We often read and hear that a plan only needs to provide a broad array of investment options; provide adequate investment education for the participants to properly investment on their own; and permit the participants to change their account periodically. We would consider this to be the chapter headings rather than the actual requirements. In reality, a 404(c) checklist provided to us by fi360 is 37 pages long.
The Qualified Default Investment Account safe harbor is a very popular and for good reason. This safe harbor protects the plan sponsor from investment liability when invested in the default account. Often, when implementing or making changes to a plan, some participants will not submit enrollment instructions in a timely fashion. In theory, those without proper investment instructions can be invested in the plan QDIA without recourse. In reality, choosing the QDIA should not be taken lightly. In the past, money market funds were often used because the risk of loss was almost impossible. That also meant that the participant was probably missing out in potential growth as well. Target Date funds have become very popular as QDIA investments but we caution that proper due diligence be conducted on the Target Date strategy to assure the formula used fits with the strategy.
This is a great safe harbor that helps the plan sponsor control administrative costs. When a plan participant separates from employment with the plan sponsor, they have the right to transfer their contributions and vested balances to a new employer or another retirement account like an IRA. When a former participant with a plan balance less than $1,000 fails to provide instructions to the administrator, the admin can send the balance to the participant. If the plan balance is greater than $1,000 but under $5,000 the admin can force the funds into a rollover IRA. In either case the small plan participant is no longer a financial burden to the plan.
Timely Elective Deferrals
This is another great safe harbor but is not nearly as popular as the others. For plan sponsors with less than 100 participants, the Department of Labor provides seven days to deposit participants funds into the plan. While the seven day safe harbor is available, the DOL does require that contributions be made immediately every pay period. We know not everything always goes as smoothly as we like and therefore the safe harbor is provided.
There is talk that plans with greater than 100 participants are provided 15 business days but this is not a safe harbor, it was a ruling so be very careful.