How To Avoid 401(k) Liability

A 401(k) plan is a "save for a rainy day" plan. One that helps you put away savings for future need. In return, and particularly to encourage people to save in this fashion, the government allows tax concessions and exemptions in the form of deferment of taxes on the amount of money contributed by you into your 401 (k) plan. Now, obviously such plans require committed, disciplined and regular contributions from your employer and you in order to reap all the benefits, and non-compliance with the plan terms and conditions leads to liabilities. What are these conditions, and how does one avoid 401(k) liability? Here are some tips -

Formulate a Policy Statement and ensure strict adherence - Long gestation investment plans that also serve as social security instruments must be handled very carefully. For starters, the law requires that the investment must be made according to a well laid-out policy statement and that said statement should provide for procedures of carrying out funding in ways that are consistent with the objectives of the policy investment. In other words, procedures should be specified for making decisions on investments. The policy statement must also contain instructions for monitoring the investments, bench-marking performance, stating expectations on returns from investments and taking corrective measures periodically.

Prudent investments and alternates for diversification - People administering 401(k) plans are vested with the responsibility of taking actions that are solely in the interest of participants and beneficiaries of the plan. To this end, they are required to make investments prudently and diligently as well as in a diversified manner so as to ensure good returns, and in the event of a downturn, the losses must be minimized.

Periodical checks on investments - Highly volatile global economies and unpredictable financial mishaps have only increased the need for a constant monitoring of investments made in plans such as the 401(k). There are several industry and legally-accepted benchmarks for investments.  Periodical checks should be conducted to evaluate investments against them and corrections initiated.

Periodical analysis in terms of end cost of the original investment plan and alternates - While what is mentioned above is highly helpful towards avoiding 401(k) liabilities, it is not quite enough. Plan administrators and fiduciaries are required to analyze costs incurred for the plan, since uncontrolled costs could erode the base-worth of the plan and render it non-viable. In fact, there are limits specified by law on maximum costs in administration of investments. These could be administrative or investment costs, and there are limits on these expenses.

Periodic audits - Conduct audits periodically as required under law. This helps monitor investments, get an outsider expert view on the manner of making the investments, expenses being incurred and administration of the plan. In some cases, strict adherence to audit procedures actually helps reduce liability of the plan administrators in case of soured investments.

Insurance - Finally, in today's world of daily financial turmoil and a highly litigation prone public, civil rights activism and government overseeing, it is quite possible that plan administrators could suffer from not complying with the large number of provisions relating to 401(k) investments. We strongly recommend fiduciary insurance to help transfer liability to the insurers who will undertake to pay all damages on behalf of the plan administrators. Of course, read the small print very carefully.

These are some steps to avoiding 401(k) liabilities.