How To Spot A Troubled Retirement Plan From A Distance or a Form 5500

Sometimes you can spot a poorly run retirement plan from a distance, sometimes it’s just as easy as reading their Form 5500. Whether you are a plan sponsor, a financial advisors, and/or third party administrator looking for new clients, you can gauge whether a plan is going through problems just by reading their Form 5500.

Here are some things to spot:

  1. The Form 5500 admits it has a serious error (prohibited transaction, no ERISA bond, later 401(k) deferral deposits.
  2. If the plan is a defined benefit plan, the plan is severely underfunded.
  3. The plan sponsor has both a money purchase and profit sharing plan. Unless they benefit different groups of employees, plans should have been merged in 2002.
  4. If the plan is a 401(k) plan, it’s on an insurance company provider platform and plan assets are more than $2 million.
  5. The broker of record is getting a hefty commission that is not reasonable by what the market dictates (i.e, % compared to plan assets).
  6. The information on Schedule C looks less than complete (especially compensated received directly or indirectly amounts).
  7. The plan is paying too much in administrative fees and auditing (if the plan requires one).

This entry was posted in 401(k) Plans, Retirement Plans. Bookmark the permalink.

8 Responses to How To Spot A Troubled Retirement Plan From A Distance or a Form 5500

  1. J. Scott Barr says:

    8. The plan has lots of employees with balances, but only a few “active” participants.

  2. Ed McCurry says:

    Thanks for the lowdown. I don’t understand why the insurance company provider platform is a problem however. We picked ours based on a competitive bid a few years ago and have been happy with the service….though I’m coming around to the feeling that asset based charges are not the way to go with paying for that service.

  3. Tom Schryer says:

    DB Plan Schedule SB attachments: 1) if plan has special disability benefit and the mortality tables do not include Revenue Ruling 96-7 contributions and PBGC premiums are probably significantly overstated, 2) a 100% rate of retirement at age 65 often means contributions and PBGC premiums significantly overstated.

  4. Jim Barnes says:

    Do you have a guide for interpreting the Form 5500 more comprehensively?

    • I’d be cautious of listening to any advice (legal or otherwise) from a source that makes such broad strokes as assuming a 2M+ plan is “poorly run” on any “insurance company provider platform”. Assuming all insurance companies look the same in the 2M+ market is a lot like assuming all attorneys are the same, and in many ways it’s equally unflattering. Just as some attorneys are better than others and specialize within specific markets, so do insurance company providers; some specialize in <1M, 1-2M, 2-5M, etc. If you have any relevant data that suggests all insurance companies are innapropriate for any plan over 2M I know many dedicated retirement plan advisors that would love to see it.

      @Jim Barnes – The Hartford has an excellent guide for interpreting the form 5500. I’ve just uploaded it to my LinkedIn profile for you to download. As an alternative, feel free to email me and I’ll reply with the guide and additional prospecting support.

      • admin says:


        I did say that a plan that has more than $2 million at an insurance company provider may be a sign that the plan is in trouble.

        While I do agree that not all insurance company providers are bad and some do have some value, I have a bias because insurance company providers never dissuaded their clients from the perpetrated myth of free 401(k) administration until now.

        As far as data, it’s pretty hard right now since many fees are still cloaked. However, here is a challenge. Let us suppose there is a 50 participant, $5 million 401(k) plan. Break out all the fees from Hartford including any wrap fees (treat it as if 408(b)(2) is in existence and I will do the same for a plan on an unbundled platform. To make it fair, I won’t use any revenue sharing paying funds. I’ll use only index mutual funds. I would be interested to see which provider is less expensive. Let me know.

  5. Angela Thomson says:

    Q. Point 4. Why is the plan in volation if an insurance carrier is service a 401(k) greater than $2 million. I would think that is common. Is there an ERISA req. I can refer to?


    Angela Thomson

    • admin says:

      Depending on how much they are paying, if fees are excessive, then it is a breach of the fiduciary duty of prudence.

Leave a Reply

Your email address will not be published. Required fields are marked *