401(k) Document Retention Rules Made Simple

Did you know that ERISA requires all employers to retain detailed 401(k) documents, including testing results, transactions and employee activity – for at least 6 years? If you did not, you’ve got a lot of company. Nevertheless, it’s important to understand and comply with these rules. While only small civil penalties are possible if required plan records are not preserved, missing records can make it more difficult for a 401(k) sponsor to defend plan operations or the accuracy of benefit payments if they are ever challenged by the IRS, DOL or plan participants. That can increase liability.

In general, 401(k) plan records must be kept for a period of not less than six years after the filing date of the IRS Form 5500 created from those records. However, records necessary to a participant’s claim for plan benefits must be kept longer. These records must be kept “as long as a possibility exists that they might be relevant to a determination of the benefit entitlements of a participant or beneficiary.” This can mean indefinitely.

Some of the most common plan records a 401(k) sponsor must retain are itemized below. To organize this information, I recommend using three files – a file to store documents that govern plan operation (a “Plan Document File”), a file for participant records (a “Participant File”), and a file for plan year information (a “Plan Year File”). This simple three file system should make it easy to access plan records if they are ever needed.

Plan Document File

This file should contain the plan’s operating documents. As items in this file are replaced by new documents, it is recommended you archive each replaced item in a safe spot for historical reference.

Items to keep in the Plan Document File include:

• Plan Documents – adoption agreement, base document, IRS advisory letter, amendments, QDRO policy, and loan policy (if loans are permitted)
• Participant Disclosures – Summary Plan Description (SPD), Summary of Material Modification (SMM)
• Corporate Actions – resolutions, agendas, minutes, and documents distributed at meetings  
• Service Agreements – Includes all plan service provider contracts
• 408b-2 Fee Disclosure(s) – Includes fees and services delivered by plan service providers
• Fidelity Bond – ERISA Section 412(a) requires every fiduciary of an employee benefit plan and every person who handles funds or other plan property be bonded.                  

Participant File

This file should contain forms provided by plan participants. Generally, these forms direct the 401(k) sponsor to take certain actions on the participant’s behalf.

Items to keep in the Participant File include:

• Payroll Records
• Participant Deferral Election Forms
• Investment Election Change Forms
• Beneficiary Designation Forms
• Distribution Request Forms (with any supporting documentation)
• Loan Request Forms
• Rollover Requests
• QDRO Split Requests (with supporting documentation)

Plan Year File

This file should contain important records related to a plan year. A Plan Year file should exist for each plan year the plan has existed.

Items to keep in the Plan Year File include:

• Annual Valuation – Contains participant-level transaction information for the plan year, including contribution, distribution and fee activity. If received quarterly, file all four quarters.
• Annual Trustee/Custodian report – Contains trust-level transaction information for the plan year, including all purchases and sales that occurred in trust. If received quarterly, file all four quarters.
• Annual Nondiscrimination Testing – 401(k) plans have various testing requirements. Most common tests include:
  • Coverage (IRC Section 410(b)) testing
  • Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing (non-safe harbor 401(k) plans only)
  • Excess Deferral (IRC Section 402(g)) testing
  • Annual Addition (IRC Section 415(c)) testing
  • Top Heavy (IRC Section 416) testing
  • Rate Group (IRC Section 401(a)(4)) testing (“new comparability” plans only)     
• Annual Participant Notices – Any notices provided to participants, including (as applicable):
  • Participant fee disclosure (ERISA 404a-5) notice
  • Safe harbor 401(k) plan notice
  • Qualified Default Investment Alternative (QDIA) notice
  • Automatic (negative) enrollment notice               
• Form 5500 – Copy of Form 5500 with related schedules as filed with Department of Labor (DOL)
• Independent Audit Report – If required to be filed with Form 5500
• Summary Annual Report – Summary of Form 5500 provided to participants

Don’t get into trouble when document retention is easy

A retirement plan, by its very nature, generates large amounts of documentation and preserving much of it is required by ERSIA. Developing a filing system can make it easy for 401(k) sponsors to review, update, preserve, and dispose of documents.

These systems do not need to be complex. A simple system with 3 file types can do the trick. Ready access to plan documentation can mean the difference between a quick, cost-free settlement to a 401(k) dispute or a drawn-out, costly battle.