Have you been hearing the buzz about mismanaged 401(k) plans? Many of the issues coming up for companies such as American Airlines, UBS, and UnitedHealth Group are a result of mismanaged forfeited funds. Confused on what those are and what you need to do about them as a plan sponsor? There’s some simple, but important information you need to know to ensure compliance around this topic.
Forfeited Funds
Forfeitures typically occur when participants lose rights to certain employer contributions in their 401(k) plan. Common sources of forfeitures include unvested employer matching or profit-sharing contributions. This occurs when an employee leaves a company before they are fully vested in employer contributions.
How Forfeitures Are Legally Used
The IRS and Department of Labor (DOL) permit plan sponsors to use forfeitures for specific, plan-approved purposes. These include:
- Paying reasonable plan administrative expenses
- Reducing future employer contributions
- Reallocating to other participants, if the plan document allows
The plan document is each company’s rulebook on how forfeitures must be used. Forfeited funds cannot be used for any purpose not explicitly permitted by the plan. Further, forfeitures can never be used for purposes that benefit the employer directly (outside of reducing plan contributions).
Why Oversight of Forfeitures Matters
While mismanagement of forfeitures is a common compliance problem, it can lead to negative consequences. For example, without proper oversight forfeitures may sit unused for years, triggering IRS penalties for operational failures. Lack of timely use can also result in lost benefits for participants or higher plan costs. Improper use, such as offsetting contributions in ways not allowed by the company’s plan document, can constitute a fiduciary breach.
Worry Free Forfeiture Management
401GO provides 3(16) administrative fiduciary services, meaning we take on responsibility for day-to-day plan operations. This includes overseeing the proper and timely use of forfeitures. We add critical safeguards such as:
- Ensuring forfeitures are applied according to the plan document and ERISA rules
- Reducing the risk of operational errors and fiduciary breaches by the employer
- Promoting consistent use of forfeitures to lower plan costs or benefit participants
- Shielding business owners from technical administrative pitfalls that could lead to audits or penalties
With 401GO’s 3(16) administrative oversight, you don’t have to guess and risk missteps when it comes to managing forfeitures. The responsibility is carried by one of our experienced fiduciaries, who helps keep the plan compliant and participant-focused. Contact us and we will guide you through plan management so you can rest easy.
