So Many Documents!
I deal with a lot of paperwork being in this industry. Because of this, my wife and I have come to a compromise at home. Any non-work-related paperwork that comes our way goes to my wife. In exchange, I do the dishes. It’s a win-win. If you are involved in the management of a 401k, you can’t bum off the paperwork in exchange for dish duty, so let’s make some sense of these piles of files.
Like any analogy, mine is not perfect by any means, but I think it makes it easy to understand what’s going on. Let’s look at a 401k like building a house. To build a house, you need a plan, city approval, and you may have some customization available. So let's see to what extent this analogy works.
Let’s compare this to the blueprints if you were building a house. The plan document is one of the most important documents in a 401k plan. This is the document that “serves as the foundation for the day-to-day plan operations” (Internal Revenue Service, 2019). It describes the plan and how it is to be administrated. If your service provider put the document together, it is likely a Pre-Approved Plan. For these types of plans, the plan document must get an IRS Opinion Letter indicating that the plan document meets legal requirements and is accompanied by an adoption agreement. Now you can see why it’s so crucial for 401k plan administrators and other fiduciaries to follow the plan document. That IRS Opinion Letter is based on the plan document. As it is put on the IRS website, “Following the plan document terms is crucial to ensure tax-favored treatment of the plan and to prevent a breach of fiduciary duty under ERISA.” (Internal Revenue Service, 2019).
IRS Determination Letter
An IRS Determination Letter is a document from the IRS that indicates the 401k plan is in line with the specific legal requirements to be a qualified retirement plan, according to tax code. Once received, the plan needs to continue to follow its governing plan documents. I like to think about this kind of like getting approval from the city to build your home. As noted above, after a plan document receives an IRS Determination Letter, the plan fiduciaries still need to follow the plan document.
401k Adoption Agreement
The Adoption Agreement is where the plan can adopt provisions specific to the company. For example, if you choose to offer a match, have a vesting schedule, decide on plan eligibility, etc. When you’re building a home, there may be some options available to you (of course if you are building a custom home, you have fewer limits to your options).
Summary Plan Description
This is one of the documents that plan administrators are required to give to their participants and beneficiaries. Employees must receive a copy of this within 90 days of being covered by the plan. As the name indicates, the Summary Plan Description summarizes the 401k. It's made to be quick, easy, and thorough. This is where the analogy no longer continues.
This is not an extensive list of important documents to have on hand. Some of the other documents to have on hand include a copy of your fidelity bond, plan amendments, fee disclosures, etc. But, the documents we went over today are some of the foundational documents of a plan. If you have questions or comments, please reach out to us. If you are interested in benchmarking your plan or getting a second opinion, please let us know.
Internal Revenue Service. (2019, June 18). 401(k) Plan Fix-It Guide - You didn't base the plan operations on the terms of the plan document. Retrieved from irs.gov: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-you-did-not-base-the-plans-operations-on-the-terms-of-the-plan-document
Internal Revenue Service. (2019, June 18). IRC 401(k) Plans - Establishing a 401(k) Plan. Retrieved from ris.gov: https://www.irs.gov/retirement-plans/irc-401k-plans-establishing-a-401k-plan