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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in New Jersey is representative of a common question on how long a plan sponsor must retain 401(k) plan records.
“How long does a plan sponsor need to retain records for its 401(k) plan?”
Great question because the actual record retention rules for qualified plans are often misunderstood. Plans must retain some records indefinitely, and others for at least six years.
As an employer sponsoring a 401(k) plan (or other qualified plan), the Employee Retirement Income Security Act of 1974, Section (ERISA §) 107 requires you to keep all plan-related records (e.g., all plan documents, nondiscrimination testing results, and Form 5500 filings and supporting documentation) available for review for at least six years. Under ERISA §209, participant records (e.g., deferral elections, beneficiary designations, distribution information, and committee minutes and resolutions) must be kept indefinitely. Plan sponsors can retain these records via electronic media if they satisfy the five requirements of final DOL regulations.
One reason to retain participant records indefinitely is so that a plan sponsor can show that a distribution was made, for example, if a participant were to look for their account balance in the future. Another example would be to make a payment to a beneficiary where a participant passed away after leaving employment, but without having taken a distribution of their account.
The IRS under IRC §6001 also has plan record retention rules, which require plan sponsors to keep records as long as they are material to plan qualification and tax administration. IRS Revenue Procedure 98-25 lists the basic requirements for electronic record retention. See Maintaining your retirement plan records for more details.
Although civil penalties under ERISA for not retaining the required plan records may not be material (e.g., $38 for each employee with respect to whom such failure occurs), not retaining this information can significantly hinder a plan sponsor’s ability to defend plan operations or benefits if challenged by the Department of Labor (DOL), the IRS, or plan participants, thus exposing a plan sponsor to a breach of fiduciary duty.
Complying with plan record retention requirements does not have to be burdensome. Plan sponsors can keep electronic folders for plan documents, required filings (e.g., Forms 5500), and participant-related data on their servers and implement procedures for ensuring that all documents are saved in the appropriate places.