The Concluding Phase of Retirement Plan Testing: Valuation
Updated: Mar 11, 2022
As with the preceding phases of retirement plan testing, there are many ways in which errors can occur during the valuation phase. It is important to understand what takes place in the valuation phase and what your TPA should be doing to ensure a smooth process. Here, we have outlined the process and the steps that must be taken to ensure there are no issues.
The valuation phase occurs after inputting all census data and reconciling any errors, the Consultant can begin testing. If the plan fails testing, the Consultant first checks that there are no coding errors that caused the plan to fail. Then they re-run the information using a different testing method. It is the Consultant’s goal to have the plan pass using the most efficient testing methodology allowed by the IRS. If the plan still fails testing, required corrections must be made, which involves an entirely different process that is outlined here. However, if the plan passes as hoped, the Consultant moves on to preparing the valuation.
The valuation involves generating reports, which include:
A letter that explains what documentation is being provided and any other important information.
A force-out report which indicates terminated participants with balances that can be paid out of the plans.
The plan activity report summarizing the financial activity for the plan year.
The final census data used for the plan year.
A contribution analysis reflecting the final contributions for the plan year.
A summary of each participant’s balance in the plan by money type.
The compliance testing reports that apply to the plan.
A client action checklist, which denotes important things that the client needs to be aware of or address.
Additionally, the Consultant will gather all necessary reports and schedules in order to complete the IRS Form 5500, which is the required tax return for retirement plans. If necessary, an IRS 5558 Extension of Time will be filed. The Form 8955-SSA will also be completed and filed by RPCSI on behalf of the Plan in any year that it is required.
After the Consultant has completed the necessary work, it undergoes a peer review. This peer review serves as an internal audit to double-check the work that has been done. This crucial step ensures that what the client receives is 100% accurate. Once the work has been double-checked during peer-review, it is ready to send out.
The whole process from the time a census is received in good order, to the time the valuation reports are sent out to clients, must fall within the specified turnaround window, which is typically 4-8 weeks. Because the government has imposed a testing deadline of March 15th, the Consultants must have their work completed and to the client in advance of that deadline to provide the Plan Sponsor enough time to complete any corrections necessary. A census with many errors can cause significant delays, so it is in the Plan Sponsor’s best interest to send clean, accurate data so their plan can be serviced as quickly as possible. A census that is full of errors and returned to the client to clean up is not counted toward that turnaround window. The receipt of clean and accurate data will ensure the client that their plan can be serviced as quickly as possible, thus giving the clients more time to meet their own deadlines.
The hard work and expense required for the first quarter servicing of your retirement plan make it possible for smooth sailing for the remainder of the year. We understand that it can feel overwhelming to gather the necessary data, answer all the questions the Consultant might ask, and track down solutions to errors. We are dedicated to being transparent about our fees and our work so you can feel confident that you are receiving the highest-quality work your dollar can buy. If you have any further questions about the work we do during the first quarter, just let us know. We are always happy to provide more information.
This outline is based on the “average” 401(k) plan with a 12/31 plan year-end. If your plan includes a Cash Balance Plan, a Safe Harbor Plan, or a different plan year-end, some of this information does not apply to your plan or occurs in a different time frame. If you would like more information on the work being completed specifically for your plan, please let us know and we would be happy to provide you with an outline like the one you see here.