Participant communication: nervous Nellies or not?

[Guest erisafried]

The scenario: An employer maintains a fairly standard 401(k) plan with a 100% match on deferrals up to 4% of compensation. Matching is done on a payroll period basis, and there is no true-up provision. The plan permits both percentage deferrals and specified dollar amount deferrals (each per pay period).

Question: How much of an obligation should the employer feel to explain to participants the fact that by front-loading their deferrals and/or making changes to their deferral percentages or discontinuing their deferrals during the year, they may end up with a total match that is less than 4% of their annual compensation? That there is no true-up provision?

[david rigby]

Is the per-payroll-period matching in the plan provisions? If not,

- is the employer merely "advance funding"?

- does the employer wish to communicate provisions not in the plan?

- does the employer believe that such administrative procedure can be changed in the future, and does the communication affect that result?

Is the match vested? Is there a last day rule? How soon are distributions made after termination of employment? (Hint: These 3 questions are inter-related.)

[Guest erisafried]

Is the payroll period matching in the plan provisions? Interesting question you pose. Veeeery interesting. Alas, the answer is, at best, "sort of." With the benefit of some extrinsic evidence about how the plan has been operated, you would know perfectly well how things work from reading the plan doc and the SPD. Without that context...maybe not so much. The plan has been administered consistently so far as I can tell -- the communications were just as clear as they could have been. The matching approach is not contrary to any plan terms or anything that has been communicated to participants.

The plan has been amended to add an annual true-up, so we will be including an explanation of that in the SPD going forward. The plan doc gives authority to the "plan administrator" to resolve ambiguities, adopt interpretations, make rules, etc. in the course of plan administration.

The match is 100% vested from day one and there is no LDY requirement. Per the plan doc, distributions are made ASAP following termination (with appropriate participant consent). I don't know what amount of comings-and-goings there have been in the plan historically, but my guess is that participation has been reasonably constant. I see where you're going with the questions though: the employer would've been making an annual true-up, so the people who get paid out before then (assuming proper plan drafting) get zip.

Ultimately, I think the employer will fork over some dough to make the participants "whole" because it feels a moral obligation to do so (sort of a refreshing response and not one that I am used to). It wanted to provide for a full 4% of annual comp match but just didn't manage to get the plan drafted that way (at least not clearly).

The issue I am trying to get my arms around is whether the failure to be absolutely crystal clear that bunching your contributions will lead to a smaller match is a mortal sin. It would be a best practice to really be clear about that, but there are lots of things that would be best practices that employers don't do. Heck, the employer here has 20% of its employees who don't participate at all. The fact that some anxious HCEs front-load and miss out (or did miss out) on a couple of hundred bucks of match -- and are not therefore taking maximum advantage of the plan -- seems like a less serious self-inflicted injury than leaving ALL of the free money on the table.

[QDROphile]

Mortal sin if the fault is in the communication. The communication was not sufficient to allow the participants to get all the benefits that they could have received under the plan if adequately informed. Violates the SPD rules and is a breach of fiduciary duty.

Also, if the employer is going to make the employees whole anyway because of the stupid behavior, don't be so fast to try to soft pedal whether or not there was an operational error in administering the plan in accordance with its terms. Admit to the error because that becomes the basis for the make-whole contributions. If you don't have an error, you may not be justified in making corrections within the plan.

[Guest erisafried]

Points taken. But...if the failure to explain to participants that front-loading may result in a total annual match of less than the specified percentage in an SPD is truly a mortal sin, then we're going to need a whole lot of absolution. I don't believe I have ever seen an express discussion of this issue in a canned SPD from any of the major vendors and don't know that I've seen it with any regularity in custom plan documents either. Yes, I realize that the "everybody else does it" argument doesn't work a whole lot better here than it did with Mom. Still, the SPD in question is neither clearer nor more obscure than any others I've seen.

Although I think that you could take the position that there was an operational issue here, it seems like a stretch. The plan doc does not provide for a true-up and is open to interpretation on the matching period. I realize that copping to an operational problem or a potential fiduciary breach may expand the remedial options but may also (particularly with the fiduciary breach -- we are dealing with an employer in a highly-regulated industry) put the employer in an awkward position in other respects.

[david rigby]

The plan doc does not provide for a true-up and is open to interpretation on the matching period.

Hmmm. Might the document be open to interpretation on whether or not there is a "true-up"?

[R. Butler]

What does the SPD actually say about the match?

[Guest erisafried]

That depends on which SPD you look at. There was an older SPD floating around that was altogether less clear on the point. It recited the matching formula (100% of deferrals up to a maximum of 4% of "base salary"). "Base salary" was described in terms of an annual amount. That version of the SPD was silent on the matching period, and no one really seems to know what (if any) additional clarification may have been provided to participants about how matching was actually done. The recordkeeper says that matching has consistently been done on a payroll period basis since the inception of the plan (late '80s).

The newer (current) SPD is much clearer on this point and specifically mentions that matching is done on a payroll period basis. It is still not clear on the compensation issue, although it does include an example that calculates a match on a payroll period basis.

The plan doc is silent on the mechanics of matching.

Although I don't think this was an intentional design choice, both the plan doc and the SPDs indicate that matching contributions will be made on deferrals of up to 4% of compensation. Not to split hairs or anything, but "you can get up to 4%" is not the same as "you will get 4%." It would be different if the plan doc explicitly provided for the latter. Then, you'd have an operational issue if you didn't provide 4%. In the absence of failure to follow an express plan term, you're in to the fiduciary side of things where bright line rules are harder to come by.

[david rigby]

The newer (current) SPD is much clearer on this point and specifically mentions that matching is done on a payroll period basis. It is still not clear on the compensation issue, although it does include an example that calculates a match on a payroll period basis.

The plan doc is silent on the mechanics of matching.

Here is your problem.