Small Business 401(k) Blog

As a business owner, you must operate your 401(k) plan according to the terms of a written plan document. Most plans use an IRS preapproved document for this purpose. All preapproved documents must be fully rewritten (or restated) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act. A new cycle - called "Cycle 3" - opened last year. Between August 1, 2020 and July 31, 2022, all pre-approved 401(k) plans must be restated from a PPA to a Cycle 3 plan document. That means now.

As a business owner, you want to understand the basic fiduciary hierarchy applicable to all 401(k) plans and the responsibilities of each role within it. This understanding can make the oversight of your 401(k) plan – basically ensuring that your fiduciary responsibilities are met – much more straightforward.

There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.

Employers have a fiduciary responsibility to ensure the fees paid by their 401(k) plan are “reasonable” – so excessive fees do not reduce the investment returns of plan participants needlessly. To do that job, employers should ”benchmark” their 401(k) fees periodically by comparing them to industry averages and/or the fees charged by competing 401(k) providers. Sounds straightforward, but this information is hard to find and often harder to compare on an apples-to apples basis.

401(k) plans must operate according to the terms of a written plan document to meet IRS qualification requirements. Most plans use an IRS preapproved document for this purpose. These documents must be fully rewritten (or restated) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act of 2006. A new cycle - called "Cycle 3" - opened last year. From August 1, 2020 to July 31, 2022, all pre-approved 401(k) plans must be restated onto a Cycle 3 document.

Each year, 401(k) plans must pass certain IRS-mandated nondiscrimination tests to confirm Highly-Compensated Employees (HCEs) do not disproportionately benefit and no IRS contribution limits are exceeded. These tests are often completed soon after the close of the year so test correction and tax deduction deadlines are not missed. For calendar-based 401(k) plans, that means now.